Learn Value Investing Strategy


The concept of value investing
came in 1934, in “Security Analysis” work of Benjamin
Graham and David Dodd. Later, Warren Buffett,
coached by Graham, was to become one of the
richest men in the world and considered by many
the best investor of our time, using the concepts
of value investing. Because of this, Buffett is considered the
leading “popularizer” of value investing. The first point to be savvy
when it comes to value investing is the difference
between value and price. Value is something intrinsic to
the company, i.e., a company has high or low value depending on
its quality as an organization, regardless of its current price; Price is the monetary
amount which the market assigns to a given
company at a given time. It may be greater or less than the
“actual value” of the enterprise. Especially in the stock market, the law
of supply and demand works too hard. If many people are selling a
stock, the price of it falls; if enough people are buying, the
price of the same stock rises. However, the “value” of the company
remains the same, and the company has not become better or worse in
the low or high of the share price. If it is a stable company,
it remains stable. If it is profitable, it
is still profitable. Thus, value investing refers
to make a qualitative analysis of the company in
which it intends to invest. The investor of this type of the
principle that buying shares are becoming the partner of
this company, because of this, he must believe in the
growth potential of the company, or your investment
makes no feeling. Understand the concept of
value, which is better: to buy shares at a price below
the value or above the value? Of course, it is better to make the
purchase with the price below value. Importantly, in value investing you
should consider the purchase of shares actually as an investment
in the purest meaning of the word. That is, the investor buys such shares
because he believes in the value of a particular company, and wants to be part
of the same owner, i.e., to be a member. If you invest in a good
company, the ups, and downs of the stock price
should not affect you because, regardless of the stock price,
the company’s value follows the same. The Father of Value Investing Benjamin Graham, the
“father” of value investing and fundamental and
valuation analysis. Benjamin Graham was famous for being
teacher of billionaire Warren Buffet. If you want to learn how to invest
well in stocks, you need to know Benjamin Graham and his
investment philosophy in action! Why is Benjamin Graham important? Every investor who
starts their investments in it Stock Exchange
always faces the debate: what is best, technical
analysis and value investing? As Charles Dow can be considered the
father of technical analysis, Benjamin Graham can be considered the father
of value investing philosophy. The efficiency of their investment
theories have been proven in practice as Benjamin Graham
was for 20 consecutive years at least 2.5 points ahead of the
Standard & Poor’s 500 stock index, few investors survived the 1929 crisis,
and Benjamin Graham was one of them. He also made a wise prediction about
the financial meltdown of 1973-1974. Benjamin Graham taught Warren
Buffet at Columbia University. Warren Buffet, who is now one
of the richest men in the world (with a fortune estimated
at US $ 58 billion), tried to work for the company of
Benjamin Graham but failed first. Graham reserved part of the
vacancies of your business to Jews who had difficulty finding
employment on Wall Street. Warren Buffett offered to work for
free for Benjamin Graham for a while. Over time, Buffett learned a lot
from Graham on investments. In the video below, Warren Buffett
speaks of two important books (required reading for those who
want to be a value investor). One of them is the book “Security
Analysis” and the other is “The Intelligent Investor” (both
written by Benjamin Graham). The book “The Intelligent Investor” is
what has changed the way of investing. Warren Buffett and
helped consolidate the philosophy of value investing
in the United States. It is worth noting that we have a
significant competitive advantage because our market is relatively new
in the category Value Investing. As our peculiarities are being
absorbed and studied, we are finding some discrepancies between price
and value in several companies. These differences are called opportunities. Thus, it is up to each of us investors know
how to evaluate each of this opportunity and apply the concepts of value investing
to get good results in the long run. The philosophy of value investing
created by Benjamin Graham Unlike speculation, which is
the basis of the investment made through technical analysis
where the primary objective is to profit from the difference between
buying and selling prices, Graham believed that prices were not the best
estimates for the real value of stock . According to his theory, prices, and
reflect investors’ expectations about a company, also reflect
your fears and anxieties. The concept of “Mr. Market”
created by Benjamin Graham This idea means that prices
could suffer fluctuations that were not necessarily
linked to practical factors. To these swings in stock prices, Graham
gave the name “Mr. Marketplace”. In fact, what he meant was
that the financial market often acts like a person who
has his fears and desires. So when stock prices rise or
fall too much, they reflect much more the emotions of
investors than information and accurate data on the
stock and financial markets, and not fully capture the
real value of the share. The real value (or fair) of an action
and the basis of value investing When it comes to “fair” value
of stock, many people think that this is the value of the
equity of a company divided by the number of shares outstanding on the
market (less those held in treasury). However, the concept of
value created by Benjamin Graham is deeper and
more comprehensive. Unlike technical analysis, where the
past data are used to try to predict the future, the philosophy of value
investing created reverses this logic. For Graham, the share price of a company
should reflect the expectations that investors have for future profits
that the company will present (in fact, represent the expected
future cash flows for the company). The expectation of future profits
is fundamental because it is on that basis that investors
plan to receive their dividends. So, this expectation is imperative. It influences the price that
the market gives to an action. The Margin of Safety Of course, you will only buy a stock
if you think your price will rise in the future, i.e., their purchasing
decision builds in a margin of safety. What differentiates the concept of
Graham is the size of this margin. The margin of safety is necessary
because it is impossible to calculate the intrinsic
value of a stock methodically so that it exists to absorb the effect of
miscalculations or even a unique chance. All methods of calculating
the intrinsic value involve predictions that may eventually
prove not as accurate. Decisions based on this method,
therefore, evolve some degree of risk. The margin of safety for an investment
is the difference between the fair price (or intrinsic value) and
the current price of the asset. The goal of the smart
investor is paying less than the value less than the
fair price for the asset. The larger the is your safety
margin, the greater the space maneuvers that you
have not to lose money. It can be found by the following formula: Safety Margin=[(Intrinsic Value
/ Current Price) – 1] * 100 What should be the size
of the safety margin for it to be considered
a sound investment? It depends on several factors,
including market conditions, investor risk tolerance, and even the prospects
for the company in question. When the investor is
confident that its determination of intrinsic
value is very precise, and it is unlikely that
action undergoes substantial fluctuations, then a smaller
safety margin may be appropriate. It is usually the case of large
and well-established companies, with the clear prospect of gains
and records of stable cash flows. Try to determine an exact fair price
to other businesses, particularly younger operating in volatile
sectors, and it can be a tough task. In this case, prudent investors
should demand a higher safety margin to compensate for the
uncertainties behind the calculation. Lord Market The value investing goes
against the movement of most investors, and most
know that it is even good. If all people would use this strategy,
it would be much impossible to find discrepancies between the price and
the intrinsic value of the shares. To be cheap stocks is
necessary that, for some reason, people are not
interested in them. If all investors to buy only stocks
with a margin of safety below the intrinsic value, the market would
be efficient and quite stable. But we know that’s not true. The market fluctuates a lot
from day to day and has large swings in valuation over the
euphoria and pessimism periods. Graham used a parable of an imaginary
investor named Mr. Market to illustrate how an intelligent investor should
take advantage of market fluctuations. Imagine that you own a share
of a particular company. Do you have an imaginary business partner
named Mr. Market, who is willing to buy from you or sell you an additional interest at
a different price he tells you every day? Mr. Market is an emotional man who
lets his enthusiasm or desperation affect the price he is willing
to buy / sell on a given day. But Mr. Market does not care
if you take advantage of it. Sometimes it is lush and determines prices
above the value of the business is worth. Other days he is pessimistic and puts a
price below the real value of the business. In such cases, the
difference between the price and the value of the
quotas can be extreme. What a smart investor should
do in this situation? Once he knows the real value of the
business when Mr. Market wants to sell at prices far below the
value it will buy his shares. When Mr. Market is looking
to buy shares for more than they are worth the smart
investor will sell them to him. The same applies to the exchange. The concept of value
according to Benjamin Graham To Benjamin Graham, a business has value
when it creates value, or when its short-term assets without debts have
real expectations of future cash flows. It means that the secret to identifying
good investment opportunities is to define actions that are
temporarily undervalued. This concept is imperative. It is through it that it is possible
the idea of investing in value: identification of stocks with potential
to increase price and generate value (which shareholder also
means the receipt of dividends). Three pillars of value investing The pillars of value
investing is the idea that value and price action
are different things is the basis of the theories developed
by Benjamin Graham and which are now used by many billionaires
who invest in the stock market. In general, your ideas can be
summarized in three key concepts: 1. One must always invest
with a margin of safety: this means that, as the financial market
often creates distortions between price and “fair value” of an action, there are always
opportunities to buy “cheap” stocks. And Benjamin Graham, the important thing is
not only to buy cheap stocks but also buy a stock within a safety margin – a significant
discount to their intrinsic value. Thus not only it is easier to
generate significant returns as it is also possible to minimize the risk
of variation in the share price. Graham was famous for the phrase “buy
a 1 billion with a coin of 50 cents”. 2. The smart investor should seek
to profit from market volatility. According to Benjamin Graham,
contrary to what many think, falling markets are
full of opportunities markets. According to him, the crisis is also times
of exaggerated and momentary pessimism in the stock price reflects somewhat distorted,
the actual condition of the companies. For Graham, the market, or “Mr. Market”,
often acts irrationally, increasing or decreasing the share price when
fears any more dangerous event. For this reason, one of the most
important rules of the investor in value is never let emotions influence their
decisions to buy or sell a stock. 3. The smart investor needs to
know what what is his profile To Benjamin Graham there
are two investor profiles: active investors and liabilities. The investor profile “active”
or “aggressive”, would be the one who has the knowledge and
the necessary conditions to identify and take
advantage of buying opportunities or sell the
financial market presents. But the opportunities that
Graham saw were not speculation opportunities with prices
(buy low to sell high). The possibilities that Graham
was the pointed to buy shares that were worth much
more than its market price, and make an investment becoming a business
partner for extended periods of time. The idea of Benjamin Graham
was a good investment only makes sense when it generates
profits in the long run. Based on this idea is
that investors ‘assets’ should make their decisions
to buy or sell a stock. An investor profile “defensive” or
“conservative” would be one that would not have the conditions to a position, i.e.
take these purchasing decisions or sale. In this case, he could get lower gains from
safer investments, or price speculation. IS THERE A NEED FOR
SETTING VALUE INVESTING? There are, of course, a
definition accurate than is value investing, the scope
that philosophy has taken and the number of investors
blockbuster that employed this philosophy,
each in a different way. In common, it is possible
to highlight the belief that actions have an
‘intrinsic value’ medium-term which may differ much from
market value, giving rise to investment opportunities that
exhibit a “safety margin”. The value investor usually seeks
to evaluate their investment based on the benefits it can derive as a
long-term holder of an instrument and not necessarily by
the short-term movements in the price of the
security or action. In most cases, value investors are
oriented to the medium and long term and are skeptical of their ability to
project the future with great accuracy. Graham himself made a very
clear distinction between investing and speculating,
based on the above concepts. For him, investing is the
activity of employing capital in financial instruments to earn
them a direct economic benefit – say a dividend receipt of rent
or a higher interest rate. Speculating is the activity of
using capital instruments in anticipation of selling them
to a third party at a profit. Different, is not it? A bit like buying something to use
or just to sell in the future. The value investor likes
to buy stocks to use. If you see an excellent sales opportunity
in the future that good – but it need not necessarily have the presence of a
buyer at a higher price in the future. The philosophy of value investing
has become so notorious for success that many
investors had to follow. Among major investors
from one generation a little older who follow
(or followed when alive), this methodology are Irvin
Kahn and Walter Schloss, Warren Buffett and Charlie
Munger at Berkshire Hathaway, Mario Gabelli (GAMCO), Mason
Hawkins (Southeastern Asset Management), Marty
Whitman (Third Avenue). Among the investors of a
generation slightly younger are Seth Klarman (Baupost), David
Einhorn (Greenlight Capital), Prem Watsa (Fairfax Financial Holdings) and
Bruce Flatt (Brookfield Asset Management). What are good buying
opportunities in this context? Buying opportunities present themselves
in different ways, and there is no rule. Over time, traders specialize
in various kinds of occasions. There are value investors who
specialize in buying very cheap stocks, sometimes because these companies
have gone through recent difficulties or because there is an
exaggerated perception in the investment community
regarding a given risk, or because there is a shortage of
capital in the market where it is negotiated. There are others who are
turning more to identify companies that generate
returns on invested capital high in their
business, even if the discount at the time of
purchase is not so great. Some investors like to identify
a discount to the value of the assets of a company that
can be difficult to analyze. There are even opportunities in situations
where a company is heavily indebted, which are more risky but can generate very
high returns and so approach options. Cheap stocks are related to their intrinsic
value or long-term value of the asset. That is, when the market price
of the asset is significantly lower than the intrinsic value,
there is a buying opportunity. The greater the difference
between price and value, under Graham, increased
its margin of safety. Of course, the price of
a stock is observable – there is a functioning
market each business day. The intrinsic value, however,
is an estimate of the investor. Despite the fact that this estimate may
be grounded in a detailed analysis, using objective data, it is not observable and
therefore includes a level of subjectivity. What is the secret of Value Investor? Discipline, patience and
psychological strength The trait that stands out
most for me from these great investors is the mental and
psychological training to analyze and develop their convictions
because often the value investor is the
wrong way of a consensus. This position can be very
uncomfortable psychologically by their isolation and corporately,
in front of customers. Very importantly, this
discipline should not be confused with
stubbornness or obstinacy. Discipline is essential for the
investor to analyze and develop their studies and investments by
their convictions and results. Often the Value Investing presents
investment options that go against the grain of many market analysts at this point
the discipline and focus are critical for investors to apply their
capital respecting their studies and not be carried
away by the herd effect. Patience stands out for waiting
time until their mature investment. The competitive advantage that you
saw in the price / value of the analyzed company can, and probably
will view belatedly by the market. Patience and perseverance are
essential in these times. Last but not least, the
psychological strength. It is important for the investor
may face opposite positions to the market, which can be uncomfortable
from the psychological point of view. At this point, it should be noted
that the discipline and mental force should not be confused with
stubbornness or determination. It is crucial to possess
humility and discipline to recognize their mistakes
and learn from them. No wonder that the greatest
investors of all time built their fortunes 100% supported by
Value Investing strategies. Concepts and stories that exemplify
what is the Value Investing The most famous value investors
you know is Warren Buffett. In his traditional annual
letter to Berkshire Hathaway investors, in 1996, Buffett said
that to invest successfully you do not need to understand complex
concepts or master the technical analysis. “In our view (referring to him and Charlie
Munger), real investors need only learn how to evaluate a company and how
to think about the price of stock. There seems to be a perverse trait in
humans trying to hinder what is easy. I am a better investor because
I am a business person. And I’m a better business person
because I am an investor. Investing based on Value Investing is
becoming a partner of excellent companies A fundamental rule for the investor who follows
the teachings of Benjamin Graham is to analyze companies as if evaluating a possibility
of becoming a member of a big deal. That’s exactly what happens
when you buy a stock. It seems silly to say, but many forget to
follow this important premise for success when they ignore everything that concerns
the financial health of a company and its prospects to focus on
graphics and the “hot tips” random – or simply do not take
its investor career seriously. Follow the value investing
is to invest in businesses that you like,
you know and trust. The Value Investing like Warren
Buffett and reminder at the beginning of this text is
simple, logical and rational. Your goal when investing should
be to buy the stable prices, stocks of companies whose businesses
are easy to be understood and whose that profits
tend to be exponentially greater in a horizon of
five, ten, twenty years. If you are not willing to “pass”
an extended period as those with an action or consider buying it,
either invest in the stock market. Investing in value is hunting discounts… If you are one of those people
who only buy products on sale, know that within you there
is already a value investor. Not always buy a share of
an exceptional company will generate the best
results in the long run. For this to occur, you
must know that you are buying the share at a price
below its real value. It is called the margin of safety, one
of the pillars of Value Investing. Act as a deadly predator The value investor will always buy
extraordinary business actions, and it is true, but that does not
mean he will buy them at any time. You have to find the balance
between price, value and time in the same way as they do the
great predators of nature. Just as the animals sniff, pursue
and analyze the prey, monitor the environment and wait for
the right time to attack, the value investor manages
its investment decision. Please do not forget that
the market is not efficient If we know that the
irrationality prevails and that volatility is one of the main
characteristics of equity, why should we believe that
the current price of a stock will always accurately
reflect its real value? It is where comes into play a character
that good value investor is keen to ignore: the often apocalyptic economic news,
which exerts a strong influence on the actions – sometimes
positively, others negatively. However, when you know the ways of Value
Investing it is not difficult to understand this schizophrenia, become oblivious to
it and find value stocks in the chaos. Every unanimity is dumb The herd effect is responsible for
many victims in the stock market. In general, investors who do
not seek to develop their knowledge and skills to
invest are easier prey. Never forget that irrationality will
always give the reins in the short term, and it can be tempting to go to
the same side that everyone is going, but that value investors
take a contrary stance to the herd. Briefly, they buy when everyone is selling
and sell when everyone is buying. It is a similar logic to buying
Christmas presents in January when the shops are empty and retail
granting substantial discounts. The 10 Commandments of Value Investor 1. While a company continues to operate
normally, it has an “intrinsic” value based on the company’s business potential
to generate and distribute profits. This intrinsic value is
not an exact value but a range of possible values
that moves in time. In cases where a company past
results show a trend relative stability, the track can be
identified with reasonable accuracy. 2. The bag is not a mechanism
to evaluate actions but a collective entity subject
to various emotions. Excepting the opportunities
to take advantage of their moments of panic, the bag
for the value investor, it is simply a place where he performs
his purchase and sale transactions. 3. Thus, over the years, the
value of a company on the stock market fluctuates
around its intrinsic value, in many cases deviating from
this value – particularly when the stock market as a whole is
down – for prolonged periods. But as the stock market is reasonably
“efficient” there is always a value of the trend on the stock market return in the
medium to long term, to the intrinsic value. Are the periods during which the
intrinsic value significantly exceeds the value on the stock market that
offer excellent buying opportunities. 4. As it is not possible
to calculate the intrinsic value of a
company with precision, and as the future trajectory
of the company is subject to a variety of
influences, many negative, it is important to buy a
stock when its price offer a significant discount to
their intrinsic value. This “safety margin”
will minimize the chance of loss and maximize the
possibility of gain. 5. To calculate the intrinsic
value of a company is necessary to analyze its trajectory over
at least 10 and ideally 20 years to establish a basis for
projecting future profits. Due to the wide dispersion of results,
however, many companies do not lend themselves to this type of study and
must be rejected as investment options. 6. If an investor has the time
and expertise to identify good companies with the great
ability to generate profits, and if it finds its shares for sale
at an attractive price, it must invest a significant percentage
of their funds in each company: such discoveries they are rare and
offer higher gain opportunities. As a result, this investor
will have few companies in its portfolio and will
keep for many years. As their investments will be concentrated
in a few companies, the investor should know these companies in depth and closely
monitor the development of their business. 7. If, however, the investor does not
face their investments as a full-time occupation, he should emphasize
techniques to minimize your risk. It should focus its attention
on companies that are prominent in your industry and have a
strong financial position, substantial sales, consistent generation
of profits and dividends, reasonable growth and indicators price /
earnings and price / equity moderate. It should establish a portfolio
with a minimum of 10 companies. Thus diversifying the risk, the average
performance of your portfolio offset errors of assessment or impact of
contingencies in case some of your choices. 8. But most important of all,
the retail investor should take steps to avoid paying
dearly for their actions. He has two alternatives. The easiest way is simply to
ensure average market prices. To achieve this, it invests in the
purchase of shares, equal values at regular intervals (a month, a
quarter or a year) over the years. Although the return to appear
tomorrow, this investor should consider an investment horizon
of at least five years. It is the natural tendency of
good companies grow their profits – and these are reflected in
the valuation of its shares – which provides the margin
of safety of this approach. 9. In the second alternative, the small
investor takes a more active stance. It establishes a wallet from a
strategy, among many, to try to identify undervalued stocks, based
on their market indicators. It can, for example, only invest
in stocks whose indicators price / earnings and price /
equity is below predefined limits. It is the discounted share
price discount evidenced by the indicators that
represent your safety margin. Paradoxically, it has no
guarantee of obtaining an additional return as a
result of their efforts. 10. Whatever the technique adopted, any
investment program must necessarily include the application of 50% of
their funds on average (and never less than
25%) in fixed income. In addition to providing
a cushion for emergencies, fixed income
complements equity, often increasing the return of equity
decreases, for example – and vice versa.

Paul Whisler

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