Value investing varies from investors to investors but there are few principles which are used by major ones. These principles were also used by famous investors like: Peter Lynch, Warren Buffet, Kenneth Fisher and other more. Value investing is all about buying a business not stocks with ignoring all price trend and market happenings. Investors should go for fundamentals of the company and its business model. It takes time and efforts but payoffs are also better.
Spending time in research and understanding business model and future growth needs efforts but this is better than following trend and market psychology which can be wrong and lead to eating up your precious money. An investor has to buy the business he wants to buy and be passionate about knowing everything in that business, researching it and understanding the business model. Many companies show good financials like Earning per share, Price to Earning and etc but investors need to forget that attractive covering and get to the deep understanding and analyzing the facts.
Choosing companies is good because if an investor likes a business which is tough to understand then he will just make guesses and invest in that business with more uncertainty and risk. Other important thing to choose is looking for owners of the business not the management. Owners will always think for long-term aspects and creating shareholders wealth while a manager can think of his own earnings, bonuses or short-term gains, this term is very commonly used in corporate that is “Principle Agent Problem”. A bad management can destroy the assets or the business model.
When market is bullish, a value investor should buy only much undervalued stocks which he can manage and be updated because it takes time to watch the movements, news and etc which can be unmanageable during lot of business record. When a value investor has excess cash or money he should not focus on diversity but look for businesses which are better than what he already owns. When market is bearish or when investor is idle then he should be involved in researching those other better stock and add to favorites and buy them when final decision is done. Ignore the market most of the time, ignore the capital gains and don’t sell as long as fundamentals are strong. Selling for capital gains will involve transaction cost and compounding effect could not be used to fullest level.
At last concluding idea from this is that value investing needs lot of discipline in comparison to a trader as it gives above average return which can be anything depending upon business chosen as 100%, 300% or anything so, to get this it needs more effort and patience as investment horizon is longer may be about 5 years, 10 years or more.
This blog is written by Anshuman Singh, MBA-FA 2015-2017 batch, ICoFP Delhi Campus
