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What is Value Investing?
Posted by: jonwebb (IP Logged)
Date: December 30, 2013 05:11PM

Intro

Value investing is an investment paradigm that was birthed by the thoughts and ideas set forth by Benjamin Graham and David Dodd in Security Analysis. It has recently been associated with Ben’s star pupil, Warren Buffet and his methods, however there are many forms of value investing and it shouldn’t be held in a stereotype. For example Warren classifies his purchases as “finding outstanding businesses for reasonable prices“ while Benjamin looked for statistical bargains. Today’s Warren Buffet wouldn’t buy RadioShack, but Benjamin Graham would consider it. My point in bringing up the differences between these two is simple – Value investing isn’t a fixed methodology that you follow from point A to point B, it is a philosophy that is based on two easy-to-understand, yet complex master principles.

Value Investing defined

It is my belief that all value investors act within a realm that is governed by the principles of margin of safety and an understanding of market fluctuations (the Mr. Market analogy)

Margin of Safety: I covered margin of safety in more depth here: “Margin of Safety: Your Safety Net.”  to go over it briefly. Margin of safety is the principle of developing a safety net into all your investments – this safety net can be the difference between tangible book value and the current share price, or it can be something like the value of a patent that is being undervalued on the books. When it comes down to it, margin of safety is the difference between the price you are paying and the value you are calculating as the real value of a firm.

Mr. Market Analogy: the analogy goes like this, you are in business with a guy named Mr. Market (ironic isn’t it) his mood changes constantly, you can say he is bi-polar. Some days he thinks you are going to undercut him so he offers to buy you out at ridiculously high valuations, other days he is depressed and what’s to get out of the business so he tries to sell you his stack in the business at  dirt cheap prices. Mr. Market like the stock market is irrational. It is run by the emotions of greed and fear. (With a little of blind hope thrown in) in the short term the market fluctuates causing share prices to go up and down.  On the other hand in the long term the market will more than likely appreciate the true value of a business.

Closing

Benjamin Graham searched statistical bargains, Warren Buffet looks for great businesses at fair prices, Peter Lynch found companies that had high growth rates and Walter Schloss simply put, bought cheap stocks. What do these guys all have in common? They all consistently beat the market and they all were value investors.  They were value investors not because they all invested with the same methods though they shared some common ground, but because they applied the governing principles of margin of safety, and Mr. Market (an understanding of market fluctuations).

Value investing is dynamic and every changing. It can be as academic as calculus or as common sense-based as looking for companies that you understand.

Until next time,

"Value investing is simply figuring out what something is worth and paying alot  less for it "– Joel Greenblatt

- Jonathan



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What is Value Investing
Posted by: ansgarjohn@twitter (IP Logged)
Date: December 31, 2013 08:06AM

Seems to me the answer depends on where you live. The tax code might be different in Europe vs the US meaning a Graham (Defensive) strategy is more interesting here in Amsterdam than in the US where you have capital gains tax IF you sell a stock. At least I recall Bestinver saying something like that and Buffettology also explains the tax advantages of Buffett-Munger investing versus Graham investing for US investors. 


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What is Value Investing
Posted by: batbeer2 (IP Logged)
Date: December 31, 2013 08:49AM

I think some of the ideas you discuss are seriously misunderstood.

- Mr market may or may not be manic/depressive but I can tell you he consists of a few million investors who all believe they are buying low and selling high. If you don't know why this is, you're one of them.

- It' s Buffett (2 ts)

- Graham didn't consistently beat the market.

- Lynch bought companies that were going to have high growth rates. There is a difference



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What is Value Investing
Posted by: jonwebb (IP Logged)
Date: December 31, 2013 12:40PM

@batbeer,everyone thinks they are right, but when you invest, or sell, because of outside influences (stock prices) thats makes you apart of mr market. not trying to hurt feelings but still.


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