Value investing is simple. Value investing, at its core, advocates that you take advantage of the stock market to buy good quality businesses at a discount to what they are worth.
How hard is it to understand that you are getting a good deal by buying something undervalued? Not at all.
And by limiting the investment universe to only good quality companies, your risk of losing money is reduced significantly.
And because the investment universe is small, you spend a lot less time researching on them. If all you had to choose was between a bungalow in Bukit Timah and another in Tanglin, you clearly have less research to do as compared to going through all the HDB, EC and private condos projects out there.
Which is why value investing is usually the best method for the man of the street. It is simple, it is relatively less risky and it requires relatively less time.
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The tricky part is knowing which are the good quality businesses and at what price to buy them at.
What is a great business?
Think of a business as a castle. An economic castle. Everyday, some invader is trying to take down the castle. To ward them off, a great business should have a big wide moat that makes it hard for the invaders. The moat can come in the form of having a strong brand, some special technology or just being the lowest cost provider in the whole wide world.
A great business is a business with a nice economic moat that provides a barrier to entry. And in general, a business of such profile, when coupled with strong management will be able to grow the business, generates loads of cash and you, as a shareholder will benefit.
What is the value?
Now, to establishing the value of a company. Broadly speaking, the company has two values - one when its gets liquidated and another when it is operating on the basis of it lasting till eternity (as a going concern).
The 1st value can be gleaned from the balance sheet of the company and is simplistically the value of its net assets (total assets less total liabilities), adjusted for any contingent liabilities or hidden value of its assets.
The 2nd value is theoretically the value of all future cashflow of the company, discounted back to present value. Differences in perceptions of what the future cashflows are, the discount rate and the eventual growth rate of the company all affect what how much someone is willing to pay for the business.
And across time, investors have created short cuts (e.g. P/E ratios) to value businesses and make buy/sell decisions. These short cuts are relevant because they are effectively the industry standards and taken to be a substitute of the discounted cash flow method.
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So in practice, all you have to do for value investing, is to identify the great business, establish a value for it and then wait for a price to buy.
It is simple. But it is not easy. To do it well still requires guidance and hand-holding by a mentor. And this is what we will provide in our seminars. A step-by-step guide on how to do it.
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