I have been investing for some years now. Mostly in stocks. And during my inexperience, I have been messing around with different systems, strategies and even trading using technical analysis. And as I grew, I’ve come to settle down with value investing.
What is Value Investing?
Its a very simple idea. If you have a business that is selling in the market. How would you know if the price tag of that business is fair? If you got some techniques to know that fair price and do it accurately, the 2nd question now becomes, is it actually cheaper? If it is, and you bought that business, then you are value investing.
Value investing in simple words is buying a company that is selling below its intrinsic value. Basically buying assets (companies, real estate, etc) that are mispriced or bargains.
Cigar Butt Investing
Now, there are different kinds of value investing. The classic value investing was the one started by Ben Graham. Its called Cigar Butt investing or Deep Value Investing. Its the same kind of investing that Warren Buffett used early in his career. The idea of Cigar Butt is to invest in a company that is selling far lower than its book value. Or to find hidden value from a company’s balance sheet, that are ignored or overlooked by other investors. A simple example: real estate properties owned by a company that is not updated to the current price of the real estate market. Those are hidden value that value investing tries to uncover.
It is called Cigar Butt because, you’re looking for cigars on the ground with one puff left. It may be ugly and disgusting but its free.
The 2nd kind of value investing is the Buffett approach. It combines the principle of Graham but with an added twist. The Buffett approach to value investing is to invest in wonderful companies. Ignore the cigar butts even if its cheap. Buffett wants cheap and great companies that he can hold for a long time.
Here are the 4 rules for investing the Buffett way:
- Invest on the things you understand
- Management must have Integrity and Talent
- The business must have a durable competitive advantage
- It must be selling at a fair (or discounted) price
I have explained these points in more detail on this post — 4 Rules of Value Investing.
Where do I stand?
I tend to do both. Looking for cigar butts is fun. Its like a treasure hunt. The only disadvantage of that is you can not make a significant position easily in stocks that are so illiquid and so unpopular. And you don’t know when the value will be unlocked. So you may get stuck on an investment that may not do anything for years. If you’re impatient, this may not be your cup of tea.
The Buffett way is what I prefer. I tend to prioritize this kind of investments. The only problem with this approach is that great companies are well followed by other people. Intelligent analysts and fund managers are following great companies consistently. And everybody knows what are the great companies. So its hard for those companies to go down at bargain levels.
Buying and holding
When I do find those great companies at bargain prices. I will hold them for the long term. I will hold them until the prices has become not just overpriced, but very very overpriced. So buying with the intention of holding forever is the plan.
Just a student of Investing
I’m no expert. I don’t feel that I am up to par with the masters. That is one of the reason why I created this blog, so I have the chance to really digest and reflect on my thoughts about investing, and hope to improve, and become great at it.
Do you have some tips on how I can get better at value investing?