Today, I will be touching on an important topic that forms the central pillar of my investment philosophy. There are four aspects of value investing.
1. Value investing is taking ownership of an excellent business.
2. There will always exist a disparity in the price of the business versus its underlying value.
3. The primary basis for buying/selling out of a business will depends on a measure of underlying value versus its market price.
4. The stock market only exists as a convenient mean to buy into or sell out of the business.
How to be a value investor
It really doesn't take much to be a value investor. You do not need to be a financial guru, shrewd economist or diligent accountant to excel in value investment. These are good to have but not necessary. What is really important is for the person to have (1) rational thinking, (2) an open mind with a willingness to adopt new perspectives and (3) emotional disengagement from the stock market, courage and patience.
A Rational Mind The value investor must have a person who has a desire to improve his knowledge through his own reading up or cross sharing with others and must be able to apply what he has learnt in school to perform his own independent judgement. He must have an open mind and is willing to accept new ideas that will challenge how the general public perceive things. In this way, the value investor will be able to see what the public cannot see and achieve what the general crowd will not be able to achieve.
Emotional Disengagment from the stock market,A value investor is able to ignore the noises created in the market and hence disengage from the emotions and mood swings that comes witht the stock market fluctuations. Only when this is achieve, the value investor will be able to make sound and rational decisions, while capitalizing on the herd's foolish behaviour.
Courage This is the next most important thing after intelligence. This is one of the most difficult thing to achieve for a retail investor. A value investor need to garner immense courage to act against herd behaviour and run in the opposite direction. The next step after completing a thorough financial analysis is to wait for the right opportunity for the investor to take a swift and decisive action to purchase the stock.
Patience - "Inactivity strikes us an intelligent behaviour. Warren Buffet once said: Wall street makes money on market activity, retail investor makes money on market inactivity. The value investor has to be patient and recognise the fact that as long as value of the company has been correctly ascertained and acquired at a significant bargain, the price will take care of itself, in due time, the market will rise to match the underlying value of the stock. The value investor should direct efforts in doing more research on the company and acquire new perspectives to analyse the business. If the company business strengthen and the market still continues to ignore it, the value investor will be even happier as he will be able to purchase the stock at a greater discount. and hence making a value for money purchase.
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