Value investing practice grows by learning from investors who have come before us and found success. Although I no longer put Warren Buffett in the category of classic value investors in Ben Graham‘s mould, he does espouse some of the key philosophies that we all can learn from. I recently took him to task by… [Read More]
Best Value Investing Blogs, Tips and Articles
Value investing is an investment strategy popularized by Ben Graham and has proved to be a superior investment strategy over long investment horizons. We all like to buy products and services on sale - value investing just extends the concept to buying and selling stocks. It tends to simplify the investment process by eliminating confusing and generally useless concepts often part of the advanced financial and management academic programs. The success as a value investor arises from understanding the business and also by staying disciplined. Therefore, value investing is as much a financial concept as it is a change in investor behavior.
As many enterprising value investors realize after many years of "value investing" in practice, just learning the concepts and methods does not make you into a successful value investors. If this was enough, you would see a large number of very successful value investor mutual fund managers with enviable long term track record. Sadly, it is not so.
In addition to learning the methods and tools of value investing, you have to acquire a certain behavioral attributes that define a value investor. A sincere appreciation of value, a healthy rejection of whatever market sets as the price as a true reflection of value or a given asset, and the guts to stay with own analysis and research for a long period of time DESPITE an uncooperative market.
In fact, the markets are normally against you for most of the time you are invested in any undervalued asset. This created a great opportunity to acquire the asset for cheap, and you did. Wouldn't it be great if once you buy something, the market quickly moves to realized the value for you? Unfortunately, this is not how it works in reality, so you need to be able to call upon a set of behaviors and beliefs to be able to wait patiently for your profits.
At Value Stock Guide, I believe that there is enough material out there that teaches you how to calculate a certain ratio, or create a discounted cash flow model. This is not the secret to investing successfully for long periods of time. The secret to investing successfully for long periods of time is how you act and react at the edges. Do you display conviction in your ideas when the stock goes against you, or do you fold meekly? How do you build up this conviction? Isn't taking the easy way out like everyone else more comforting? Why do you invest - is it because you like the thrill of buying and selling, or is it because you patiently want to see your portfolio grow? Can you sit and watch the paint dry for days, if you know that at the end of the week there will be a substantial reward waiting for you?
I tackle many behavioral and soft side of value investing on these pages. Sometimes I also talk about the concepts. No one has ever become a good investor without building their core base of correct foundational investing attributes. You can do this here.
The articles below explain the concept of value investing, tips and tricks including articles aimed at beginner and advanced investors. Many of the concepts presented here are result of the evolution of value investing practice over time. Original value investing research and strategies are also posted here.
At some point you will wish to start using some of these ideas in your investing. We can help you find the best stocks to buy now and create a well optimized and high performance portfolio.
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Buffett no longer relies on book value as a valuation metric. Among the reasons stated: Book value does not reflect the current or market value of assets – it does not reflect the intrinsic value of the company Intrinsic value is a better metric for valuation Market prices are more relevant To which I say… [Read More]
James Holzhauer is currently in an unprecedented run on the game show, Jeopardy. He has broken many records so far, and he is going for the highest cumulative prize money haul in the history of the show. He already has won $1.69 million dollars as of this writing. He plays with one goal: maximize his… [Read More]
Uber IPO is scheduled for Friday, May 10. The stock is being offered at $45/share, at the lower end of the pricing range. You may be wondering if this is a great opportunity to get into the Uber stock “at the ground floor”. After all, Uber is an unicorn company. Perhaps this is the best… [Read More]
Return on Equity is one of the primary financial ratios investors use to judge a company’s operations. If I were to pick one metric that matters (OMTM) for investors looking into a company’s operational excellence, return on equity would be the that metric. It appears to be Warren Buffett’s favorite metric.
Financial ratios are an integral part of a value investor’s arsenal.
But, they do not always tell the full story. Or even the right story.
As an investor, you need to consider the ratio analysis as a part of what you do. The other part is to try and build a story around your investment and then see if the story checks out.
Limitations of Financial Ratios
An entrepreneur can be described as a person who organizes and operates a business or businesses, taking on greater than normal financial risks in order to do so. The latter part of that definition is a major reason why value investors are not good entrepreneurs. We hate risk.
To investors, Enron appeared strong and prosperous. However, what was hiding outside of their financial statements would lead to one of the largest scandals in Wall Street history. Chief Financial Officer, Andrew Fastow, argued a clever twist of the rules prior to being handed a six year prison sentence. By the end of 2001, everyone was left wondering what had just happened.
Although Enron’s manipulation was deemed illegal, many publicly traded companies partake in similar methods without raising concern from regulators. It is an accounting practice commonly known as off-balance-sheet activity.
Let’s get into what off-balance-sheet activity is and how it is used.
Over-diversification presents a clear risk to most investor’s portfolios. A typical investor is now diversified beyond the optimal. As a result the benefits of diversification are blunted, while the rewards are reduced due to over diversification. An optimally diversified portfolio should consist of 20-30 stocks in a variety of industries.
One of the consequences of using a volatility based position sizing strategy (we use the risk parity method) is that for highly volatile stocks, you may start out with a very small initial position. However, the level of undervaluation in the stock may call for a larger position to be eventually established.
This may lead you to wonder if the philosophy of value investing precludes us from using these portfolio optimization strategies.
Not at all.
Kelly Criterion was developed by John Kelly at Bell Labs. It has been proven to maximize the portfolio growth over time compared to any other strategy.
It is rumored that Warren Buffett and Bill Gross use Kelly Criterion or some modified version of it.
If you have been investing for a while, you have undoubtedly considered buying stock on margin. And why not! Your broker offers margin investing (what is a stock broker?). You have a great idea for stocks to buy. You just have enough money to buy 100 shares, but if you use the full margin available to you in your account, supported with this stock and other stocks in your account, you can potentially buy 200 or 300 shares of this stock.
Did I say you believe that the stock is a sure thing?
In this scenario, should you use margin and buy the extra shares?
Buying and selling stock requires discipline and well defined approach if you wish to be a profitable investor. I think a lot of us are very fixated on getting the highest price they can receive when they sell a stock. I think this is a very rational attitude to have, however to actually execute it well is a tough ask.
Checklist investing is a simple process with tremendous benefits. An investment checklist can protect you from yourself, and propel you towards investment success.
Value vs growth investing is a no contest.
There’s a lot of debate around the philosophy of value vs growth investing. Value investing is the process of investing in stocks that are undervalued relative to their intrinsic value, while growth investing refers to the philosophy of investing in companies that have consistent earnings growth as well as the promise of above-average growth in the future.
You can make money investing in the market – if you have the right mindset.
When one thinks about the characteristics that make for a good value investor, there are a few non-negotiables. Temperament is key – an investor needs to be able to divorce themselves from what everyone else is doing and insulate themselves from their own emotional swings.
There is often this inherent conflict in a value investor’s mind that continues to play for almost every investment he makes. If you have been investing for a while, you will read what I am writing and nod along. You know what I am speaking of. Best Value Investors Have 2 Qualities in Balance Quality… [Read More]
When it comes to investing, the key for most people to make money is to avoid as much risk as possible. In order to accomplish this, it’s best that all investors decide to diversify their investment portfolios in all possible ways. However, while it may sound simple, diversification is anything but that. However, by following… [Read More]
Anyone who has ever tried to value a company has used some rules of thumb when conducting the financial ratio analysis. For me personally, these form a base upon which various stock screens and shortlists are structured. Looking for undervalued stocks can at times feel link looking for a needle in a haystack, and these rules of thumb can come in very handy ease the screening process and get to the shortlist faster, so we can quickly commence the joyous process of reading the appropriate financial statements and conducting a deeper due diligence on each stock.
Cyclical stocks tend to be reliable profit generators in a value investor’s portfolio. Cycles exaggerate the valuations because they cause uncertainty in the market. So arguably, value investing should work very well. In practice, it can be hard to identify the right investment candidates and pick the right time to invest.