An Simple Introduction to Value Investing

Knowledgeable investing can impact significantly on your life:  

• it can provide for a comfortable retirement, 
• send your children to college and 
• provide the financial freedom to indulge all sorts of fantasies.

Grocery shopping

Think of the search for value stocks like grocery shopping for the highest quality goods at the best possible price.  Understanding the philosophy of value investing, you learn to stock the shelves of your value store (portfolio of stocks) with the highest quality, lowest cost merchandise (companies) you can find.


More people owns stocks today than at any time in the past.  Stock markets around the world have grown as more people embrace the benefits of capitalism to increase their wealth.  Yet how many people have taken the time to understand what investing is all about?  No very many.




Making knowledgeable investment decisions can have a significant impact on your life.

Sensible investing, which can be found in the art and science of the tenets of value investing, is not rocket science.  It merely requires understanding a few sound principles that anyone with an average IQ can master.''

Value investing has been around as an investment philosophy since early 1930s.  The principles of value investing were first articulated in 1934 when Benjamin Graham, a professor of investments at Columbia Business School, wrote a book titled Security Analysis.  This approach to investing is easy to understand, has greater appeal to common sense, and has produced superior investment results for more years than any competing investment strategy.




Value investing is a set of principles that form a philosophy of investing.

It provides guidelines that can point you in the direction of good stocks, and just as importantly, steer you away from bad stocks.  Value investing brings to the field a model by which you can evaluate an investment opportunity or an investment manager.  Value investing provides a standard by which other investment strategies can be measured.



Why value investing? 

Because it has worked since anyone began tracking returns.  A mountain of evidence confirms that the principles of value investing have provided market-beating returns over long periods.  And it is easy to do.

Few investors and few professional money managers subscribe to the principles of value investing.  By some estimates, only 5% to 10% of professional money managers adhere to those principles.

Benjamin Graham, Walter Schloss and Warren Buffett are committed value investors.  Learn from their histories.

You need to invest but you don't need to be a genius to do it well.

Areas of Opportunity for Value Investors: Investing in Corporate Liquidations

Some troubled companies, lacking viable alternatives, voluntarily liquidate in order to preempt a total wipeout of shareholders' investments. 

Other, more interesting corporate liquidations are motivated by

• tax considerations, 
• persistent stock market undervaluation, or 
• the desire to escape the grasp of a corporate raider. 

A company involved in only one profitable line of business would typically prefer selling out to liquidating because possible double taxation (taxes both at the corporate and shareholder level) would be avoided.

A company operating in diverse business lines, however, might find a liquidation or breakup to be the value-maximizing alternative, particularly if the liquidation process triggers a loss that results in a tax refund. 

Some of the most attractive corporate liquidations in the past decade have involved the breakup of conglomerates and investment companies. 


Most equity investors prefer (or are effectively required) to hold shares in ongoing businesses. Companies in liquidation are the antithesis of the type of investment they want to make.

• Even some risk arbitrageurs (who have been known to buy just about anything) avoid investing in liquidations, believing the process to be too uncertain or protracted. 
• Indeed, investing in liquidations is sometimes disparagingly referred to as cigarbutt investing, whereby an investor picks up someone else's discard with a few puffs left on it and smokes it. 

Needless to say, because other investors disparage and avoid them, corporate liquidations may be particularly attractive opportunities for value investors.

Value Investing and Contrarian Thinking

Value investing by its very nature is contrarian. 

Out-of-favor securities may be undervalued; popular securities almost never are. 


What the herd is buying is, by definition, in favor.

• Securities in favor have already been bid up in price on the basis of optimistic expectations and are unlikely to represent good value that has been overlooked. 

If value is not likely to exist in what the herd is buying, where may it exist?

• In what they are selling, unaware of, or ignoring. 
• When the herd is selling a security, the market price may fall well beyond reason. 
• Ignored, obscure, or newly created securities may similarly be or become undervalued. 

Investors may find it difficult to act as contrarians for they can never be certain whether or when they will be proven correct. 

• Since they are acting against the crowd, contrarians are almost always initially wrong and likely for a time to suffer paper losses. 
• By contrast, members of the herd are nearly always right for a period. 
• Not only are contrarians initially wrong, they may be wrong more often and for longer periods than others because market trends can continue long past any limits warranted by underlying value. 

Holding a contrary opinion is not always useful to investors, however.

• When widely held opinions have no influence on the issue at hand, nothing is gained by swimming against the tide. 
• It is always the consensus that the sun will rise tomorrow, but this view does not influence the outcome. 

By contrast, when majority opinion does affect the outcome or the odds, contrary opinion can be put to use. 

• When the herd rushes into home health-care stocks, bidding up prices and thereby lowering available returns, the majority has altered the risk/reward ratio, allowing contrarians to bet against the crowd with the odds skewed in their favor. 
• When investors in 1983 either ignored or panned the stock of Nabisco, causing it to trade at a discount to other food companies, the risk/reward ratio became more favorable, creating a buying opportunity for contrarians.

Where to look for opportunities: The Challenge of Finding Attractive Investments

Investment Research: The Challenge of Finding Attractive Investments 

While knowing how to value businesses is essential for investment success, the first and perhaps most important step in the investment process is knowing where to look for opportunities. 

Investors are in the business of processing information, but while studying the current financial statements of the thousands of publicly held companies, the monthly, weekly, and even daily research reports of hundreds of Wall Street analysts, and the market behavior of scores of stocks and bonds, they will spend virtually all their time reviewing fairly priced securities that are of no special interest.


Good investment ideas are rare and valuable things, which must be ferreted out assiduously.

• They do not fly in over the transom or materialize out of thin air. 
• Investors cannot assume that good ideas will come effortlessly from scanning the recommendations of Wall Street analysts, no matter how highly regarded, or from punching up computers, no matter how cleverly programmed, although both can sometimes indicate interesting places to hunt. 

Upon occasion attractive opportunities are so numerous that the only limiting factor is the availability of funds to invest; typically the number of attractive opportunities is much more limited.

• By identifying where the most attractive opportunities are likely to arise before starting one's quest for the exciting handful of specific investments, investors can spare themselves an often fruitless survey of the humdrum majority of available investments. 

Value investing encompasses a number of specialized investment niches that can be divided into three categories:

• securities selling at a discount to breakup or liquidation value, 
• rate-of-return situations, and 
• asset-conversion opportunities. 

Where to look for opportunities varies from one of these categories to the next.

• Computer-screening techniques, for example, can be helpful in identifying stocks of the first category: those selling at a discount from liquidation value. Because databases can be out of date or inaccurate, however, it is essential that investors verify that the computer output is correct. 
• Risk arbitrage and complex securities comprise a second category of attractive value investments with known exit prices and approximate time frames, which, taken together, enable investors to calculate expected rates of return at the time the investments are made. Mergers, tender offers, and other risk-arbitrage transactions are widely reported in the daily financial press-the Wall Street Journal and the business section of the New York Times-as well as in specialized newsletters and periodicals. Locating information on complex securities is more difficult, but as they often come into existence as byproducts of risk arbitrage transactions, investors who follow the latter may become aware of the former. 
• Financially distressed and bankrupt securities, corporate recapitalizations, and exchange offers all fall into the category of asset conversions, in which investors' existing holdings are exchanged for one or more new securities. Distressed and bankrupt businesses are often identified in the financial press; specialized publications and research services also provide  information on such companies and their securities. Fundamental information on troubled companies can be gleaned from published financial statements and in the case of bankruptcies, from court documents. Price quotations may only be available from dealers since many of these securities are not listed on any exchange. Corporate recapitalizations and exchange offers can usually be identified from a close reading of the daily financial press. Publicly available filings with the Securities and Exchange Commission (SEC) provide extensive detail on these extraordinary corporate transactions. 

Many undervalued securities do not fall into any of these specialized categories and are best identified through old-fashioned hard work, yet there are widely available means of improving the likelihood of finding mispriced securities.

• Looking at stocks on the Wall Street Journal's leading percentage-decline and new-low lists, for example, occasionally turns up an out-of-favor investment idea. 
• Similarly, when a company eliminates its dividend, its shares often fall to unduly depressed levels. 
• Of course, all companies of requisite size produce annual and quarterly reports, which they will send upon request. Filings of a company's annual and quarterly financial statements on Forms 10K and 10Q, respectively, are available from the SEC and often from the reporting company as well. 
• Sometimes an attractive investment niche emerges in which numerous opportunities develop over time. One such area has been the large number of thrift institutions that have converted from mutual to stock ownership. Investors should consider analyzing all companies within such a category in order to identify those that are undervalued. Specialized newsletters and industry periodicals can be excellent sources of information on such niche opportunities.

Conventional Valuation Yardsticks: Dividend Yield

Dividend Yield

Why is my discussion of dividend yield so short?

• Although at one time a measure of a business's prosperity, it has become a relic: stocks should simply not be bought on the basis of their dividend yield. 

Too often struggling companies sport high dividend yields, not because the dividends have been increased, but because the share prices have fallen. 

• Fearing that the stock price will drop further if the dividend is cut, managements maintain the payout, weakening the company even more. 
• Investors buying such stocks for their ostensibly high yields may not be receiving good value.  On the contrary, they may be the victims of a pathetic manipulation. 
• The high dividend paid by such companies is not a return on invested capital but rather a return of capital that represents the liquidation of the underlying business. 
• This manipulation was widely used by money-center banks through most of the 1980s and had the (desired) effect of propping up their share prices.

Conventional Valuation Yardsticks: Earnings, Book Value, and Dividend Yield
Both earnings and book value have a place in securities analysis but must be used with caution and as part of a more comprehensive valuation effort.

Value Investing Shines in a Declining Market

Who's swimming naked?

When the overall market is strong, the rising tide lifts most ships.

Profitable investments are easy to come by, mistakes are not costly, and high risks seem to pay off, making them seem reasonable in retrospect.

As the saying goes, "You can't tell who's swimming naked till the tide goes out."



Torpedo stocks

A market downturn is the true test of an investment philosophy. 

Securities that have performed well in a strong market are usually those for which investors have had the highest expectations.

When these expectations are not realized, the securities, which typically have no margin of safety, can plummet.

Stocks that fit this description are sometimes referred to as "torpedo stocks," a term that describes the disastrous effect owning them. 

For example, the previous share price of a company had reflected investor expectations of high earnings growth.  When the company subsequently announced a decline in first-quarter earnings, the stock was torpedoed.



Securities owned by value investors are often unheralded or just ignored.

The securities owned by value investors are not buoyed by such high expectations.  To the contrary, they are usually unheralded or just ignored. 

In depressed financial markets, it is said, some securities are so out of favour that you cannot give them away.

Some stocks sell below net working capital per share and a few sell at less than net cash (cash on hand less all debt) per share; many stocks trade at an unusually low multiple of current earnings and cash flow and at a significant discount to book value.



A notable feature of value investing is its strong performance in periods of overall market decline. 

Whenever the financial markets fail to fully incorporate fundamental values into securities prices, an investor's margin of safety is high.

Stock and bond prices may anticipate continued poor business results, yet securities priced to reflect those depressed fundamentals may have little room to fall further. 

Moreover, securities priced as if nothing could go right stand to benefit from a change in perception.  

• If investors refocused on the strengths rather than on the difficulties, higher security prices would result.  
• When fundamentals do improve, investors could benefit both from better results and from an increased multiple applied to them. 
• The higher multiple reflected a change in investor psychology more than any fundamental developments at the company.

Turning investing principles into good investing habits

So just what is a habit?

A habit is:

• a recurrent, often unconscious pattern of behaviour that is acquired through frequent repetition, and,
• an established disposition of mind or character.

As an investor,you need to not only learn to do it well but also to do it with some consistency, and do it without struggling to remember what you did last time.  

As a low volatility investor, you are not likely to be as active trading in the markets as some other investors, and you may not watch as closely.

Any investor - active, inactive, aggressive or low volatility - has a duty to keep up with his or her investments.

For the low volatility investor and others, it is important to develop certain habits, routines, or thought processes for:

• choosing investments,
• watching and managing investments, and
• selling or replacing investments.

With the right habits, you will increase the chances of success.

Turning principles into habits

Investors have obvious goals:  to produce wealth and to preserve capital.

Anything an investor does should address both goals, preferably simultaneously.

As an investor, you are motivated to succeed and, over time, you build a set of strategies and tactics to help you achieve those goals.

"Motivation is what gets you started.  Habit is what keeps you going."

It is easy to get motivated.  It is harder to learn the ropes - the skills and techniques - required to become a good investor.  

But what may be hardest of all, once you gain experience and enjoy some investing success, is to turn those skills into habits.

Habits that become built in, second nature, repeatable and predictable, and not only lead to good results but help you avoid bad ones.

Without consistent habits, low volatility investors will make mistakes and find themselves off in the weeds. 

Good investing habits are like a good golf swing: apply those habits to every investment choice and you won't succeed every time, but your chances for success will brighten considerably.

Analysing a company's future performance and estimating its value

Analysing a company's future performance and estimating its value 

• begin with examining historical and current data and 
• then making projections.

Several sets of forecasts or scenarios

Several sets of forecasts or scenarios should be made using different assumptions concerning

• the business environment and 
• the strategy of the firm.

A simple example is where only two or three scenarios are created, example,

• a business-as-usual scenario,
• an aggressive marketing or acquisition scenario, and 
• an operational improvement scenario.

Estimating Value

The value should be estimated using

1. various explicit forecast horizons and
2. different methods.

1.  Estimating Value using Various explicit forecast horizons

There are usually two periods to forecast:

• the explicit forecast period and 
• the period after that in which the challenge is to estimate the continuing value for that period.

2.  Estimating Value using Different methods

There is also the choice of using these methods for estimating value:

• the free cash flow (FCF) method and 
• the economic-profit method.

Both methods should be used and their results compared.

By estimating value using different explicit forecast horizons and methods,

• the robustness of the model and 
• the consistency of the assumptions can be verified.

The Power of Mental Habit

A habit is a learned response that has become automatic through repetition.  Once ingrained, the metnal processes by which a habit operates are primarily subconscious.

Four elements are needed to sustain a mental habit:
1.  A belief that drives your behaviour.
2.  A mental strategy - a series of internal conscious and subconscious processes.
3.  A sustaining emotion.
4.  Associated skills.

SE Asia Stocks: Malaysia at record high; Fed meeting eyed

July 16, 2012

BANGKOK, July 16 – Southeast Asian stock markets extended gains today with Malaysian shares hitting a record high as fears of an economic hard-landing in China subsided, but trading volumes were low as investors waited for a US Federal Reserve meeting.

Malaysia hit an all-time high of 1,635.96 points with a 0.6 per cent gain, while the Philippines outperformed the region with a 1.6 per cent jump.

Indonesia gained 0.7 per cent to a more-than one-week high with, Thailand edged up 0.3 per cent to its highest since May 8.

Singapore closed 0.1 per cent firmer at 2-1/2-month high.

Regional analysts said investors cautiously bought into equities ahead of Federal Reserve Chairman Ben Bernanke’s semi-annual testimony to the US Congress on the economy set for tomorrow and Wednesday. – Reuters

Adopt a Value-Investing Philosophy and Start Investing Today

Once you choose to venture beyond U.S. Treasury bills, whatever you do with your money carries some risk. 

Don't think you can avoid making a choice; inertia is also a decision.

It took a long time to accumulate whatever wealth you have; your financial well-being is definitely not some thing to trifle with.

For this reason, I recommend that you adopt a value-investing philosophy and either

• find an investment professional with a record of value-investment success or 
• commit the requisite time and attention to investing on your own.

There are a number of issues that investors should consider in managing their portfolio.

While individual personalities and goals can influence one's trading and portfolio management techniques to some degree, sound buying, and selling strategies, appropriate diversification, and prudent hedging are of importance to all investors.

Of course, good portfolio management and trading are of no use when pursuing an inappropriate investment philosophy, they are of maximum value when employed in conjunction with a value investment approach.

Ref:  Margin of Safety by Seth Klarman

Mastering The Art Of Value Investing

IN THE SPOTLIGHT | 26 MARCH 2010

Mastering The Art Of Value Investing

By Clement Kan

Simply put, the essence of value investing lies in buying stocks at less than their intrinsic value. The discount of the market price to the intrinsic value was what Benjamin Graham, father of value investing and Warren Buffett’s mentor, referred to as the ‘margin of safety’.

Just like Buffett and Graham, Ken Chee and Clive Tan, co-founders and trainers of the increasingly popular Millionaire Investor Program, strongly believes in the beauty of value investing. More importantly, it was this common passion that brought them together on their value investing journey when they met at an entrepreneur program 4 years ago.

“Back then, we used to form a mastermind group of 8 and meet up once a month to study chapters after chapters of various investment books and subsequently put what we have learnt to use by analysing different companies,” Ken reminisced during an interview with Shares Investment (Singapore).

According to Ken, who has attained financial freedom at a tender age of 34, one of the most important reasons for developing the Millionaire Investor Program was to help create as many enlightened millionaires as possible via the platform of value investing. “Also, we have discovered that in order to retire comfortably at the age of 65 in Singapore, one should have an average of $1 million in cash, and hence its name,” he added.

Highlighting the fact that the Millionaire Investor Program is no get-rich-quick scheme, Ken said while there is a certain group of people yearning to make quick bucks in the equity market, there is also another group of individuals wanting to learn the proper way of investing. He further mentioned that a lot of people could not differentiate between trading and investing. “Trading is for institutions. It is not meant for retail folks, as most of them just do not have the technology and temperament to succeed,” Ken commented.

Gaining popularity amongst the investing public

Focusing On Fundamentals


A 3-day course from 9am to 9pm, the Millionaire Investor Program allows participants to better understand and grasp the key concepts of value investing through interesting games and tools. More specifically, the Millionaire Investor Program teaches participants on how to analyse real companies through interpreting financial statements not from the point of view of an accountant or an employee but from the point of view of an investor or business owner. To find out more about the program, you can visit their website at www.millionaire-investor.com.

“Accountants will treat assets as assets. However, based on our experience in managing businesses, we realised that some assets may not necessarily be assets, while some liabilities may not be liabilities,” explained Clive, who was a former high school teacher. Apart from the Millionaire Investor Program, Ken and Clive also own a branding consultancy company and a childcare business respectively.

And things don’t just stop there after one completes the 3-day program. There will be quarterly networking sessions, where graduates come back for reviews and discussions. Occasionally, the management of the listed companies will be invited down to share about their businesses and investment merits. “We also have plans to organise plant visits in the near future,” Clive remarked.

As fittingly put across by Ken, the strength of the Millionaire Investor Program lies in its weakest link. That is to say, for someone who practically knows nothing about equity investing, he or she will be able to understand the true meaning behind financial jargons such as profit and loss, assets, liabilities and PE ratio, to name a few.

Gone are the boring and dry lessons

In The Pipeline


Having established a firm footing on local shores, Ken and Clive are looking to bring the Millionaire Investor Program into regional markets. Notably, they will be holding their maiden program in Ho Chi Minh around April or May. Jakarta is another city that they are currently exploring.

On whether he believes in technical analysis, Ken pointed out that although technical indicators do provide a glimpse of market sentiment, more often than not, one could get confusing signals from various indicators.

Preferring to stick to analysing the fundamentals as opposed to predicting future market directions, Ken personally likes VICOM, citing the company’s ability to generate sustainable cash, low capital expenditure and lack of competitors as key reasons. “Another company worth looking at is Asia Pacific Breweries. If you had bought its shares in 2001 at around $3, you would have gained an annual compounded return of 20%,” Ken exclaimed.

I guess for Ken and Clive, as well as other proponents of value investing, nothing beats buying into an undervalued company with a solid business model and watching its share price shoot through the roof. That, I suppose, is the beauty of value investing.

http://www.sharesinv.com/ar

Ten Habits of Highly Successful Value Investors

Ten Habits of Highly Successful Value Investors


Warren Buffett once said, "All there is to investing is picking good stocks at good times and staying with them as long as they remain good companies."


Keeping this in mind, here are ten things to remember as you evolve your value investing style.

1. Do the due diligence
2. Think independently and trust yourself
3. Ignore the market
4. Always think long term
5. Remember that your're buying a business
6. Always buy "on sale"
7. Keep emotion out of it
8. Invest to meet goals, not to earn bragging rights
9. Swing only at good pitches
10. Keep your antennae up