Value Investing- Is it for you?
If you have been investing in shares for a while, you would have come across this term. But do you really understand what it means and know how to apply it.?
Many people have a strong opinion on this style of investing.
Value investing is dead some scream. It’s too expensive to wait for value stocks to deliver. Is that true. ?
It would be interesting to note that though Benjamin Graham is commonly known as the father of value investing , he actually never used the term. He and his colleague David Dodd penned their book “Security Analysis” way back in 1934. He wrote the book “Intelligent Investor” in 1949 and Buffet says it’s the best book about investing ever written.
Graham talked about “active” and “passive” investors. Active being the ones who have more time on their hands and seek out exceptional buys in the market to profit from it in the short term. While passive investors cautiously analyse stocks and buy for the long term. We can see how the meaning of these two terms have changed over the years. Nowadays when we refer to “passive” investing we are talking about investing in the S & P 500 Index or any other index fund. We take out the effort of stock picking and try to diligently invest into this fund on a regular basis in the hope of having a decent nest egg at retirement.
Buffet fans will recognise this as one his regular recommendations.
Will this strategy get us the returns we hope for ?
Won’t there be some duds in the S & P Index ?
Of course the stock market has changed a lot in 70 odd years. We have many more companies now. The ways companies operate, the type of industries and the pace of global trade all have an impact on the share price and being able to determine it’s intrinsic value.
At the heart of value investing is being able to accurately forecast if a company will perform well in the future.
And for those reasons is the price cheap right now ?
In layman’s terms , it’s like an item that you have been eyeing in your online shopping cart or catalogue. You know the quality is good but somehow don’t want to shell out the high dollars for it.
Many years ago I was going to New Zealand and wanted to be adequately prepared for the icy wind and chilly temperatures. I had been browsing at the Kathmandu store for a few months before that. The jackets were of good quality but I didn’t want to purchase one for an eye watering sum of $290 that I may not use that frequently. So I waited for the next sale and guess what it was marked down to a $100. Boy ! Was I thrilled. Fast forward 7 years later I have still got that jacket and I actually use it much more than I thought I would. One of my best purchases.
That is the same euphoria that value investors get when they get to buy a stock at a cheaper price. But there are the “value traps”- stocks that appear cheap and do not appreciate in the long term. Using my previous analogy that would equate to me buying a water bottle and hiking pants that were on sale too. I didn’t really need those items but I got lured into purchasing them because they were on SALE.
This approach can be used when investors expect the market to revalue. However unlike a retailer this is not advertised and you have to be ready to strike when other’s are fearful and selling.
What usually happens in a market correction is that people seek the security of big established companies. Experts believe we are having some sort of a market correction now.
Buffet has already beaten all of us and invested in the big trading houses of Japan and struck gold as these companies like Marubeni surged back to their highest ever valuation as they benefit from the rebound in commodities.
Who knows whether this trend will continue?
So at the heart of it , the concept is quite simple. But it’s the implementation that becomes difficult.
The data one has to analyse is enormous. The depth of knowledge of countries and the cyclical nature of industries and geo political events are just the tip of the iceberg.
So how can we benefit from this concept ?
- Firstly don’t act on hot tips from your Uber driver or your well intentioned auntie.
- Arm yourself with knowledge….go ahead and read the “Intelligent Investor”.
- Understand your emotional quotient. A big part of investing is having control of one’s emotions.
- Start with small amounts and be regular.
- If this topic doesn’t interest you outsource it. Research for the best options to get someone to do this for you. Let them do all the hard work.
- Match your goals to your investments.
- Have fun with the research. Dive deep into companies that interest you. Maybe your favourite coffee manufacturer or stationery supplier.
This article is not intended to be financial advice. Please seek out a specialist if you are serious about value investing in your portfolio.
