Interestingly, the internet doesn't have a good layman definition of value investing. Well, at least, not one that is easily understandable and can appeal to general people to adopt such an investment philosophy.
So we are back to basics in this post (Again!), to introduce more people to value investing. Yes a tall order given that people are wondering whether they will keep their jobs and have money to buy food next week. Much less to buy stocks!
Nevertheless, this blogger is undaunted. Here goes!
In simple layman terms,
Value investing simply means adopting an investment philosophy to buy something that's worth a dollar with a lot less, like 60c or less.
Here is a modification of the old formal definition that I posted some years back.
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Value investing is a broad definition of a style of investment that follow two basic principles:
1) Buying investments that are undervalued
2) Buying investments with a margin of safety
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If you think about it, this concept is so simple that it makes one wonder why investing can be made so complicated. Well, for most of the time, human emotions like greed and fear are playing tricks to blur our rational minds. And these emotions are very good (at blurring us) esp when there are prices, charts and patterns, newsflow bombarding us daily.
Over the years, the paradigm of value investing has expanded to encompass many things:
1. Fundamental analysis (FA) needs to be rigorously employed in order to determine the stock's intrinsic value. This plots value investing into the infamous FA vs TA argument. TA stands for technical analysis ie looking at charts and stuff.
2. Buying a stock is like owning a business. Hence long investment horizon becomes norm as business owners don't buy and sell their co.s like oranges. And also undervalued stocks usually take some time to revert to it's intrinsic value.
3. Stocks that have certain characteristics become known as value stocks
a. predictable business operations and stable earnings (easier to calculated its intrinsic value),
b. low PER, PBR, high dividend, high cashflow or other "value" quantitative factors
4. Based on the points raised in 3, value stocks typically come from mundane industries like food and staples, utilities and other old economy industries ie no high-tech, alternative energy or bio-venture stuff.
5. It is generally accepted that Benjamin Graham is the father of value investing. Other well-known value investing practitioners include: David Dodd, Irving Kahn, William Ruane, Martin Whitman, Charles de Vaulx, John Templeton, Charlie Munger and Warren Buffett.
Since the concept of buying something that is undervalued is so broad, value investing is sometimes used to refer to investing in special situations like merger arbitrage, discount bonds (e.g. some bonds trading at 50% below par value and pays 10% interest and has little risk of default). However, this blogger thinks that this is a stretch for value investing.
For most people, it should suffice to understand that value investing is about owning a partial stake in a good company by buying its stock at a reasonable price.
So we are back to basics in this post (Again!), to introduce more people to value investing. Yes a tall order given that people are wondering whether they will keep their jobs and have money to buy food next week. Much less to buy stocks!
Nevertheless, this blogger is undaunted. Here goes!
In simple layman terms,
Value investing simply means adopting an investment philosophy to buy something that's worth a dollar with a lot less, like 60c or less.
Here is a modification of the old formal definition that I posted some years back.
----------------------------------------------------------------
Value investing is a broad definition of a style of investment that follow two basic principles:
1) Buying investments that are undervalued
2) Buying investments with a margin of safety
----------------------------------------------------------------
If you think about it, this concept is so simple that it makes one wonder why investing can be made so complicated. Well, for most of the time, human emotions like greed and fear are playing tricks to blur our rational minds. And these emotions are very good (at blurring us) esp when there are prices, charts and patterns, newsflow bombarding us daily.
Over the years, the paradigm of value investing has expanded to encompass many things:
1. Fundamental analysis (FA) needs to be rigorously employed in order to determine the stock's intrinsic value. This plots value investing into the infamous FA vs TA argument. TA stands for technical analysis ie looking at charts and stuff.
2. Buying a stock is like owning a business. Hence long investment horizon becomes norm as business owners don't buy and sell their co.s like oranges. And also undervalued stocks usually take some time to revert to it's intrinsic value.
3. Stocks that have certain characteristics become known as value stocks
a. predictable business operations and stable earnings (easier to calculated its intrinsic value),
b. low PER, PBR, high dividend, high cashflow or other "value" quantitative factors
4. Based on the points raised in 3, value stocks typically come from mundane industries like food and staples, utilities and other old economy industries ie no high-tech, alternative energy or bio-venture stuff.
5. It is generally accepted that Benjamin Graham is the father of value investing. Other well-known value investing practitioners include: David Dodd, Irving Kahn, William Ruane, Martin Whitman, Charles de Vaulx, John Templeton, Charlie Munger and Warren Buffett.
Since the concept of buying something that is undervalued is so broad, value investing is sometimes used to refer to investing in special situations like merger arbitrage, discount bonds (e.g. some bonds trading at 50% below par value and pays 10% interest and has little risk of default). However, this blogger thinks that this is a stretch for value investing.
For most people, it should suffice to understand that value investing is about owning a partial stake in a good company by buying its stock at a reasonable price.
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