VALUE INVESTING: - 8 Rules followed by Great value investors like Warren Buffett (English)

 

VALUE INVESTING: - 8 Rules followed by Great value investors like Warren Buffett

 

INTRODUCTION

Last Time I was read an article where a financial expert in the simplest of statements declared that value investing is dead he put forth some points produced graphs on how the value strategy  but while hearing his arguments I could not shake off this feeling that most people do not understand value investing well in fact it’s most unfortunate that the true nature of value investing has been diluted and corrupted to mean the buying of cheap stock out of fashion industries which is definitely not the case since the 1920s when value investing was first developed by benjamin graham and david dodd. This art the science of investing has been adjusted and improved by many renowned practitioners Practitioners like Warren Buffett Charlie munger, doctor Michael, Burry jewel green blood and even the not that famous ones like Tom Gaynor, monish pabrai, guy spear, Mark Cooper and others who have added more dimensions to value investing but what’s common between these many practitioners is there allegiance to certain rules that form the bedrock principle of value investing and in this article we should go through eight such value investing rules.

1.VALUE INVESTING IS NOT SPECULATION

 let’s begin Benjamin Graham is widely considered as the father of value investing an in his classic book the intelligent investor, he said and I quote an investment operation is one which upon thorough analysis promises safety of principle and an adequate return operations not meeting these requirements are speculative so there are some key lessons here Requirements are speculative so there are some key lessons here in these two short sentence is firstly 1.value investing is intelligent investing an needs to be supported by detailed research and analysis and secondly the focus should be on avoiding capital losses and generating an adequate growth in capital as against playing out a speculative high odds low probability venture simply said value investing is calculative qualitative and even predicted within reason but is definitely not speculative.

2.KNOW THY INTRANSIC VALUE

 A majority of buy and sell decisions in the stock market are made on the basis of price movements however value investors believe that over the long the price of a stock generally matches its underlying value which is also called its intrinsic value, Which means if stock is presently priced below its intrinsic value then there is a case for buying the stock at this discounted price now there is no one way to estimate a company’s intrinsic value some practitioners use a simple price to earning or PE  ratio which explains the price one needs to pay one rupee of profits other investors use relative measures like the PE ratio of a company versus the other investors use relative measures like the PE ratio of a company versus the industry an then there are more refined models revolving around the peg ratios enterprise value to a ebitda the discounted cash flow method replacement cost approach some of the parts methodology etc.

3. Seek a Margin of Safety

 the difference between a stock's current market price and its intrinsic value is called its margin of safety. for example if a stock is currently trading at ₹100 and the intrinsic value computes tu 95 rupees this stock has a margin of safety of 5% now the intrinsic value is an estimate which is derived from historical information about the company the competitors the industry the economy and uses up all kinds of assumptions for the future which may or may not fructify in other words there may be positive or negative errors in our calculations and having a high margin of safety gives us an added cushion or a safety net to the investor like an odd example of 5% margin of safety is too little to give any comfort to a value investor in fact most value investors often seek a margin of safety ranging from 30% to 60% to support their investing rationale which if we connect to earlier point on intrinsic value means that the marginal safety also represents the potential upside your investments if all your assumptions come true.

4. Think Years not Months

 Although not always but sometimes it can take a pretty long time for a company’s share price to match its intrinsic value this can we do too many reasons like the state of the economy or the sector itself being out of favour or perhaps the non availability of a catalyst for that particular company this hibernation. Can run into many years and the rules of value investing requires practitioners to show patience during that time and wait for the market to recognise the company’s true value in terms of stock price this of course is easier said than done in a Twitter fed world that’s busy chasing mean stocks and whatever else is trending around the world. But that is known denying that patience is the key to one success as a value investor in fact it was Warren Buffett a student of Benjamin Graham and perhaps the most popular invest in the world who said that the stock market is nothing short of a device that transfers money from the impatient to the patient so if you are a value investor take Mr buffett’s advice and learn to be patient.

 

5. HAVE A Contrarian Mindset

 as an investor if you feel the urge to go with the flow or if you like the momentum style of investing then value investing might not be for you and that's because almost by definition stocks become undervalued when investors are looking elsewhere will something that happens like clockwork in the stock markets for example in the year 2020 the energy technology and pharma sectors were the hottest sectors to invest in which also happened to be the most ignored sectors at different intervals between 2015 and  2019 the larger point here is that a good value investor is one who can ignore all the noise that’s happening around him can go against momentum can go against conventional wisdom and can then invest in something that no one else seems to be looking at it might even look foolish at times or a lot of times but to succeed have a value investor the confidence in one's investing pieces is more important than the fear of looking foolish net net a contradient mindset is surely not everyone's cup of tea but is a mighty essential trait to have in a value investor.

6. Avoiding Losses in the First Priority

 Benjamin Graham and David Dodd published security analysis in 1934. The United states had seen an economic depression like none other with one in four workers unemployed over 4000 banks feeling and the stock markets losing almost 90% of its value between 1929 and 1932. it comes as no surprise then that Graham and Dodd advocated what is often considered the number one rule of value investing and that is avoid losses and the Max for that is surprisingly simple if the value of your portfolio drops by 30% and then gains by 30% you're not really back to parity and instead would have lost some part of your portfolio value which in this case is 9% in other words by losing value you have to make even more returns to come back to the same position as you were there previously and when you need more returns especially in a short time span it generally means taking more risks which can lead to more losses so that the complex cycle of return and risk one might find oneself in if you would lose money in the stock market successful value investors minimize the risk of big losses by keeping a large margin of safety not chasing speculative opportunities and by focusing only on those sectors and businesses that they truly understand and while it's true that they may not always get market beating growth but a good value investor knows by heart that if they can avoid the need to recover from losses they will be in a much promising position to achieve a high risk adjusted return.

7.Know what you own and why you own It

             IN a much promising position to achieve a high risk adjusted return value investing is not a passive strategy in fact stock selection is exactly what distinguishes value investing from other forms of investing at the heart of the value investors successes the deep knowledge of the companies they own which includes things like Include things like what does the company do who are the competitors what’s the mood or the competitive advantage which valuation model fits in the best why is the stock selling at a discount and many other points and while it’s important to know these things when investing it is also critical to stay updated on any and all major developments affecting the company this is best done by reading and understanding the financial statements participating in quarterly analysts calls meeting the management in doing past employees and getting a perspective from other stakeholders which includes the competitors suppliers and customers of the company 99% of investors don't do any of this which is why value investing and its practitioners form a very small part of the investing population

 

8. PLAY WHEN THE ODDS ARE IN YOUR FAVOUR

 Much like the rules we have seen thus far value investing requires investors to respect the market dynamics and play with the odds are in their favour in fact in his book Benjamin Graham speaks about a Mr. market whose an imaginary investor whose behaviour is driven by different shades of panic and euphoria if Mr market is in a particularly optimistic mood when he quotes a rather high stock price but if he’s depressed then he’s ready to accept a much lower price, Graham uses this allegory to show that while Mr market’s behaviour is rather mercurial it is completely up to the investor to make a move by investing or not to make a move in other words value investing requires you to swing only when the odds are in your favour and be prepared to sit on cash when there are no visible opportunities and with this we conclude the eight principles the 8 rules that are the guiding light value investing strategy in our view value investing is intelligent investing. it needs investors to not follow the herd have a deep knowledge about certain sectors have patience be calculative and not speculative and definitely have a long  term focus.

 ON the Indiabooksummary is blogging site, we shall be coming up with a few more article specific to value investing so if you haven Regular visit this site and enhance own knowledge.

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