Some friends tell
me that they feel a bit overwhelmed with value investing as it seems
too complicated. In reality, the basics of value investing are pretty
straightforward. We just need to have an understanding of the
following 2 cornerstones.
Value for Money
Value for money is essentially about buying into undervalued companies. For example if a company is intrinsically worth 50 million dollars and you can purchase 10% of the company from the stock market for less than 5 million dollars, you are buying into an undervalued company. The steeper the discount, the greater the value.
Why would a company trade at a lower price than its fair value? Primarily because assessing the fair value of a company can be subjective. Even with many objective numbers to refer to (e.g. PE ratios, ROI etc), stock analysts' views on a stock can differ greatly. The key to mastering this cornerstone is to learn to accurately assess the value of a company.
Durable Competitive Advantage
Fundamental to value investing, is the belief that one cannot accurately predict short term fluctuations in the stock market. Value investing is essentially about investing for the long haul. As such, simply buying into an undervalued company is not good enough. The company must also have a durable competitive advantage. Basically, we don't want to buy into a company that is only going to be the flavour of the month. What value investors want, is a company that will still be a market leader many years down the road.
Paraphrasing what my old fluid mechanics lecturer, Professor Collins, said with relation to Bernoulli's principle, when a value investor dies and his or her brain is dissected, we should be able to find these 2 cornerstones imprinted there!
Value for Money
Value for money is essentially about buying into undervalued companies. For example if a company is intrinsically worth 50 million dollars and you can purchase 10% of the company from the stock market for less than 5 million dollars, you are buying into an undervalued company. The steeper the discount, the greater the value.
Why would a company trade at a lower price than its fair value? Primarily because assessing the fair value of a company can be subjective. Even with many objective numbers to refer to (e.g. PE ratios, ROI etc), stock analysts' views on a stock can differ greatly. The key to mastering this cornerstone is to learn to accurately assess the value of a company.
Durable Competitive Advantage
Fundamental to value investing, is the belief that one cannot accurately predict short term fluctuations in the stock market. Value investing is essentially about investing for the long haul. As such, simply buying into an undervalued company is not good enough. The company must also have a durable competitive advantage. Basically, we don't want to buy into a company that is only going to be the flavour of the month. What value investors want, is a company that will still be a market leader many years down the road.
Paraphrasing what my old fluid mechanics lecturer, Professor Collins, said with relation to Bernoulli's principle, when a value investor dies and his or her brain is dissected, we should be able to find these 2 cornerstones imprinted there!
