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.

Value Investing: Keep Emotions Out of It

As you evolve your value investing style, keep this in your mind always.


Keep Emotions Out of It


    

The wisdom shared is about avoiding emotional attachments to stocks and the businesses they represent.

If you LOVE Dutch Lady#   , don't invest in it until you like the numbers.  And if the numbers look good and you invest, but they start to look bad later, be able to recognize that.  

Value investors continuously look for the good and the bad and keep their RATIONAL wits about them as they decide to buy and keep their investments.  The purpose of an investment is to achieve a greater financial goal and not to become a "member of the family".

DON'T HESITATE TO ADMIT YOUR MISTAKES.  Value investors admit their mistakes and learn from them.  They take the time to understand what changed (or was overlooked in the first place), and they move on.  

They have a RATIONAL "sell" model and aren't afraid to sell a business when underlying reasons to own it have changed or if the price is way out of line with value.  



# Dutch Lady is a stock in the KLSE.

Ten Signs of Value

Here are ten "core" signs of value to guide your value investing process.  When all or most signs are present, the business is on the right track.

1. Steady or Increasing Return on Equity (ROE)
2. Strong and Growing Profitability
3. Improving Productivity
4. Producer, NOT Consumer of Capital
5. The Right Valuation Ratios
6. A Franchise
7. Price Control
8. Market Leadership
9. Candid Management
10. Customer Care

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.

Example:


In early 1987 the shares of Telefonos de Mexico, S.A., sold for prices as low as ten cents. The company was not doing badly, and analysts were forecasting for the shares annual earnings of fifteen cents and a book value of approximately seventy-five cents in 1988. Investors seemed to focus only on the continual dilution of the stock, stemming from quarterly 6.25 percent stock dividends and from the issuance of shares to new telephone subscribers, ostensibly to fund the required capital outlays to install their phones. The market ignored virtually every criterion of value, pricing the shares at extremely low multiples of earnings and cash flow while completely disregarding book value.

In early 1991 Telefonos's share price rose to over $3.25. The shares, out of favor several years earlier, became an institutional favorite. True, some improvement in operating results did contribute to this enormous price appreciation, but the primary explanation was an increase in the multiple investors were willing to pay. The higher multiple reflected a change in investor psychology more than any fundamental developments at the company.




Ref:  Margin of Safety by Seth Klarman

Do you invest in what you don't understand?

Principles of value investing have helped create legends of the likes of Warren Buffett and Peter Lynch. The principles are simple and easy to understand. Pick a sound business that is available at cheap valuations. And then hold it till such time the value is realized.

But the most important principle is to invest only in what you understand. This means to stay within your own circle of competence. As Buffett puts it "Everybody's got a different circle of competence. The important thing is not how big the circle is. The important thing is staying inside the circle." As simple as it sounds, it is the most difficult principle to follow. And wandering away from it can cause investors the biggest harm.

A case in point for this is that of the emerging market guru, Mark Mobius. While Mobius has enjoyed tremendous success with his investment techniques in Asia, his emerging market fund has not done so well outside of the region. In fact, the geographically diverse Emerging Market Fund has ranked only 103 out of 236 funds over 10 years in total returns.

So does it mean that Mobius has changed his style of investing? No he has not. He still sticks to his principles of picking value buys. However, it may be possible that he has just stepped outside his circle of competence.

Do you stick to your own circle of competence while choosing your investments?


http://www.equitymaster.com/

10 TENETS OF VALUE INVESTING

10 TENETS OF VALUE INVESTING

Value investing is ultimately common sense applied to capital allocation.

Its general philosophy and key tools can be summarized in the following 10 value-investing tenets.

1. MR. MARKET PRINCIPLE
2. BUSINESS ANALYST PRINCIPLE
3. REASONABLE PRICE PRINCIPLE
4. PATSY PRINCIPLE
5. CIRCLE OF COMPETENCE PRINCIPLE ****
6. MOAT PRINCIPLE
7. MARGIN OF SAFETY PRINCIPLE ****
8. IN-LAW PRINCIPLE
9. ELITISM PRINCIPLE
10. OWNER PRINCIPLE

That's what value investing is.

OWNER PRINCIPLE

OWNER PRINCIPLE

The cumulative effect of these principles is a characterization of the value investor’s role in corporate investing as the owner of not just stock, but a business.

Hence the principles of business analyst, moat, margin of safety, and son-in-law.

It requires appreciating stock selections in the same way the owner of a small business treats decisions concerning his store, farm, or firm.

It requires a long-term view and means avoiding the rapid-fire share turnover characteristic of so many short-sighted market traders.

That’s what value investing is.

Also read: 10 TENETS OF VALUE INVESTING

1. MR. MARKET PRINCIPLE
2. BUSINESS ANALYST PRINCIPLE
3. REASONABLE PRICE PRINCIPLE
4. PATSY PRINCIPLE
5. CIRCLE OF COMPETENCE PRINCIPLE ****
6. MOAT PRINCIPLE
7. MARGIN OF SAFETY PRINCIPLE ****
8. IN-LAW PRINCIPLE
9. ELITISM PRINCIPLE
10. OWNER PRINCIPLE

ELITISM PRINCIPLE

ELITISM PRINCIPLE

Few stocks or other investments live up to these principles rigorously applied.

Value investors treat companies as applicants to an exclusive club they run and wish to keep exclusive.

It is far safer to make the error of omission than to make the error of inclusion.

Those invited to join a value investor’s portfolio after applying this elitist exclusionary policy can be invited often, more of their stock bought as circumstances warrant.

It is far more important to diversify across asset classes – having a savings account, some bonds, real property, and stocks – than it is to diversify across stocks.

Also read: 10 TENETS OF VALUE INVESTING

1. MR. MARKET PRINCIPLE
2. BUSINESS ANALYST PRINCIPLE
3. REASONABLE PRICE PRINCIPLE
4. PATSY PRINCIPLE
5. CIRCLE OF COMPETENCE PRINCIPLE ****
6. MOAT PRINCIPLE
7. MARGIN OF SAFETY PRINCIPLE ****
8. IN-LAW PRINCIPLE
9. ELITISM PRINCIPLE
10. OWNER PRINCIPLE

IN-LAW PRINCIPLE

IN-LAW PRINCIPLE

The headline-grabbing accounting scandals of the early 2000s underscore the age-old importance of trust in investing.

Value investors invest only in the stock of companies known to be run by faithful stewards of investor capital.

They seek proven track records of good judgment and fair treatment.

History is not always reliable, but any hints of malfeasance in a manager’s record are enough to disqualify his employer.

Value investors imagine managers of companies they are considering as prospective in-laws.

If they would not want their child to marry a company’s top manager, they don’t invest money in that company.

Also read: 10 TENETS OF VALUE INVESTING

1. MR. MARKET PRINCIPLE
2. BUSINESS ANALYST PRINCIPLE
3. REASONABLE PRICE PRINCIPLE
4. PATSY PRINCIPLE
5. CIRCLE OF COMPETENCE PRINCIPLE ****
6. MOAT PRINCIPLE
7. MARGIN OF SAFETY PRINCIPLE ****
8. IN-LAW PRINCIPLE
9. ELITISM PRINCIPLE
10. OWNER PRINCIPLE

MARGIN OF SAFETY PRINCIPLE ****

MARGIN OF SAFETY PRINCIPLE ****

Value investors worry that they might be wrong when complying with these first five principles.

So they add a belt in addition to these suspenders.

Drawing on the point that prices are different than values, value investors insist on as large a favourable margin of difference between them as possible.

Doing so produces a margin of safety against judgment error.

While none of these 10 principles should be ignored, this is the most fundamental and universal.

Obeying this one promotes obedience to the others as well.

Also read: 10 TENETS OF VALUE INVESTING

1. MR. MARKET PRINCIPLE
2. BUSINESS ANALYST PRINCIPLE
3. REASONABLE PRICE PRINCIPLE
4. PATSY PRINCIPLE
5. CIRCLE OF COMPETENCE PRINCIPLE ****
6. MOAT PRINCIPLE
7. MARGIN OF SAFETY PRINCIPLE ****
8. IN-LAW PRINCIPLE
9. ELITISM PRINCIPLE
10. OWNER PRINCIPLE

MOAT PRINCIPLE

MOAT PRINCIPLE

Market gyrations, price-value discrepancies, and risks of overconfidence warrant exercising extraordinary caution in selecting an investment.

In focusing on the business, value investors ascertain whether the business itself is substantially insulated from adversity.

Value investors avoid businesses threatened by product market downturns, recessions, competitive onslaughts, and technology shifts.

The business itself must be fortified by a moat, a defensive barrier to these ill effects such as arise from brand-name ubiquity, staple products, market strength, and adequate research and development resources.

Franchise value is exhibited by high, sustainable returns on equity (ROE).

Also read: 10 TENETS OF VALUE INVESTING

1. MR. MARKET PRINCIPLE
2. BUSINESS ANALYST PRINCIPLE
3. REASONABLE PRICE PRINCIPLE
4. PATSY PRINCIPLE
5. CIRCLE OF COMPETENCE PRINCIPLE ****
6. MOAT PRINCIPLE
7. MARGIN OF SAFETY PRINCIPLE ****
8. IN-LAW PRINCIPLE
9. ELITISM PRINCIPLE
10. OWNER PRINCIPLE

CIRCLE OF COMPETENCE PRINCIPLE ****

CIRCLE OF COMPETENCE PRINCIPLE ****

Value investors make hard-headed assessments of their competencies. If they doubt their skill in stock selection, they steer clear.

Value investors know their limits, thickly drawing the boundaries of their circle of competence.

They avoid investment prospects beyond those boundaries as well as anything even close to the boundaries.

This rules out broad segments of industry, enhancing prospects and economizing on time and resources devoted to studying business.

Those who cannot even identify a circle of competence should avoid stock picking altogether.

----

For those who feel a need to allocate a portion of their wealth to stocks, choose vehicles other than individual stocks, such as mutual funds, index funds, or do so through a diversified retirement account.

However, these operate as subparts of the broader market, and therefore can be over- or underpriced.

This means applying the same ten principles of disciplined investing, but perhaps less rigorously so.

Also read: 10 TENETS OF VALUE INVESTING

1. MR. MARKET PRINCIPLE
2. BUSINESS ANALYST PRINCIPLE
3. REASONABLE PRICE PRINCIPLE
4. PATSY PRINCIPLE
5. CIRCLE OF COMPETENCE PRINCIPLE ****
6. MOAT PRINCIPLE
7. MARGIN OF SAFETY PRINCIPLE ****
8. IN-LAW PRINCIPLE
9. ELITISM PRINCIPLE
10. OWNER PRINCIPLE

PATSY PRINCIPLE

PATSY PRINCIPLE

Patsies lose money in stock investment.

Market timers and others with the inability to assess the underlying value of businesses should not even participate in the art of stock selection and investment.

Those so afflicted are like the patsy in poker, the person unaware that his funds will shortly be held by someone else.

Poker and stock-picking are tricky enterprises, not for the overconfident.

Also read: 10 TENETS OF VALUE INVESTING

1. MR. MARKET PRINCIPLE
2. BUSINESS ANALYST PRINCIPLE
3. REASONABLE PRICE PRINCIPLE
4. PATSY PRINCIPLE
5. CIRCLE OF COMPETENCE PRINCIPLE ****
6. MOAT PRINCIPLE
7. MARGIN OF SAFETY PRINCIPLE ****
8. IN-LAW PRINCIPLE
9. ELITISM PRINCIPLE
10. OWNER PRINCIPLE

REASONABLE PRICE PRINCIPLE

REASONABLE PRICE PRINCIPLE

It is never worth the value investor’s time or effort to forecast when tops and bottoms are reached.

If price is a fraction of value, value investors buy, knowing that there is a chance that the price will fall lower.

Over long periods of time the gap will narrow and often reverse.

Also read: 10 TENETS OF VALUE INVESTING

1. MR. MARKET PRINCIPLE
2. BUSINESS ANALYST PRINCIPLE
3. REASONABLE PRICE PRINCIPLE
4. PATSY PRINCIPLE
5. CIRCLE OF COMPETENCE PRINCIPLE ****
6. MOAT PRINCIPLE
7. MARGIN OF SAFETY PRINCIPLE ****
8. IN-LAW PRINCIPLE
9. ELITISM PRINCIPLE
10. OWNER PRINCIPLE

BUSINESS ANALYST PRINCIPLE

BUSINESS ANALYST PRINCIPLE

Value investors do not guess when the market or a stock is at its peak, trough, or specific points in between.

There will nearly always be times when some positions are priced attractively compared to value and others when the opposite is the case.

During periods characterized by bullishness, as the late 1990s, there are fewer value opportunities; during bearish times, as in the early and mid-2000s, there are more.

The universe of prospects enlarges as markets fall and contracts as they rise.

Tendencies in either direction reinforce themselves, as pessimism or optimism spreads.

This requires knowledge of business, accounting, and valuation principles.

Also read: 10 TENETS OF VALUE INVESTING

1. MR. MARKET PRINCIPLE
2. BUSINESS ANALYST PRINCIPLE
3. REASONABLE PRICE PRINCIPLE
4. PATSY PRINCIPLE
5. CIRCLE OF COMPETENCE PRINCIPLE ****
6. MOAT PRINCIPLE
7. MARGIN OF SAFETY PRINCIPLE ****
8. IN-LAW PRINCIPLE
9. ELITISM PRINCIPLE
10. OWNER PRINCIPLE

MR. MARKET PRINCIPLE

MR. MARKET PRINCIPLE

Value investors make a habit of relating price to value.

They recognize that stock markets rise and fall.

The prices of individual stocks likewise swing widely.

In the case of stocks and stock markets, a bull exhibits excessive optimism, a bear excessive pessimism.

Dreary rationality, where value investors live, lies in between.

There are stocks priced above what the underlying business is really worth and stocks priced below that.

While over long periods of time the process evens out, the ideal strategy is to search aggressively for investment prospects priced below value.

Also read: 10 TENETS OF VALUE INVESTING

1. MR. MARKET PRINCIPLE
2. BUSINESS ANALYST PRINCIPLE
3. REASONABLE PRICE PRINCIPLE
4. PATSY PRINCIPLE
5. CIRCLE OF COMPETENCE PRINCIPLE ****
6. MOAT PRINCIPLE
7. MARGIN OF SAFETY PRINCIPLE ****
8. IN-LAW PRINCIPLE
9. ELITISM PRINCIPLE
10. OWNER PRINCIPLE