On May 13, 2017, I gave a talk in Beijing about value investing. I started with some explanation on the theory then gave some examples of the thought process behind some value investments I’ve made in the past. Over the next few days, I will post parts of the talk here. Feedback is most welcome!
Value Investing: An Overview
Disclaimer: Nothing in this post should be considered investment advice. This post is meant to be informative and educational about value investing.
Value Investing Is Hard
Actually, all securities investing is difficult. Not only because we can’t predict the future, but also because:
- Few barriers to entry
- Profits seem to come easy (attracts many people)
- Highly scalable (margin leverage)
- Extremely competitive
- Can be an emotional roller-coaster
- Losing money can be devastating
Furthermore, every trade has a right and wrong side, but you don’t know which side is wrong until some time has gone by. So, I urge you, be careful with your hard-earned savings.
The Value Investing Philosophy
- Value investing is a bottom-up strategy. This means we focus on underlying business, rather than top-down industry trends and macro factors.
- Value investing is absolute-performance oriented, not relative-performance oriented. Why? Because we can’t possibly be patient investors, waiting for our fat pitch, if we are chasing relative performance on a monthly, quarterly or yearly basis.
- Value investing is a risk-averse approach. This means we assess the risks and returns independently for each investment, with heavy weighting on the risk of capital loss.
Value investing is supposed to be a rational, disciplined approach. By adhering to a value investing approach, you can get deep conviction on your investments and this can protect you (and your capital) from speculation, irrational emotions, confusion and herd-chasing.
The goal is to purchase securities when their market prices differ significantly from their fundamental value.
It can be summarized by the phrase: “Buying a dollar for 40 cents”
Is Value Investing Right for You?
This is a question you will want to ask yourself. There are many different investment styles. I recommend exploring and learning at least a little about each investment style and philosophy.
I’ve read a lot about value investing and many people have suggested traits, habits and general advice for newcomers.
Here’s a short list of what a value investor needs:
- Do their own homework
- Critical thinking
- Common sense
- Patient confidence
- Do their own homework (did I say that twice?)
If that sounds like you, or if you’d like to work on those things, value investing my be right for you.
The Different “Levels” of Value Investing
We can classify value investors into three “levels” by the amount of time required for each. For level 1 expect something between 1-2 hours per month, Level 3 should treat your investing like a full-time job, and Level 2 is somewhere in the middle.
The classification of these “levels” borrow heavily from Benjamin Graham’s The Intelligent Investor (levels 1 & 2) and Joel Greenblatt’s You Can Be A Stock Market Genius (level 3). I’ve added some of my own suggestions. Do not rely on this table for an investment strategy (it is not a strategy!), rather use it as a starting point for new topics to explore.
That’s all for this post. Thanks for reading! If you have a question or a comment, please leave it below.
Up next is Defining an Investment Operation and an example Value Investing Process.