Why Value Investing?
Value investing is the method that has been developed based on Benjamin Graham’s teachings on investing. He didn’t necessarily define it as ‘value investing’, but it was called that later in order to simplify and summarize his ideas. The concept appears to be simple, but extremely hard to execute.
What and How?
Graham basically encouraged fellow investors to make trades with Mr. Market under one condition: You as an investor need to get a good deal on Mr. Market’s proposal. How would you do that you might ask? One of many things to consider is a company’s historic financial situation. A company should have more than just stable financial history, it needs to show the ability to deliver strong financial results year after year, decade after decade. How does their 5 year P/E (price to earnings) ratio compare with their current ratio? How about their P/B (price to book) ratio? If a company goes bankrupt how much money would you actually get per share? What do you know about their business model and their management team? Are they capable of driving the company forward? What is the future outlook of the industry the company is currently in? These with many other questions are the ones asked when using the ‘value investing’ method. These type of questions are essential when going through fundamental analysis in order to determine the true intrinsic value of the company. At the end, you compare your results with what Mr.Market is offering you at the moment. If Mr. Market’s price is off the charts, you would be a crazy person to accept his offer and buy shares of that company. The key thing to remember is you need to be in control, and not let Mr. Market.
Mr. Buffet considers Benjamin Graham more than just an author or a teacher. He compared him to his father and said that he influenced his life more than any other man (excluding Buffet Senior). Mr. Graham was Buffet’s teacher at Columbia University and Buffet was able to take his teachings to the next level early in his life. Buffet managed to find extraordinary companies that were fairly priced throughout his career unlike any other investor in the world. Keep in mind that although value investing is a good place to start, it is not a guaranteed way of beating the market and becoming a successful investor.