The rulebook of successful investors: principles behind value investing.

By Saurav Thakur

The stock market, we all have heard this term more than once in our life. Every time the index dwindles, it certainly creates ripples throughout the country. So, let’s take an insight into one of the parts of the stock market i.e. investing.

Investing and trading.
 
Most of us think that trading and investing are two same things whereas these are polar opposites of each other. Trading is basically related to just creating an income source whereas investing is more about creating wealth. If you are holding your positions for a short time then you are probably trading, whereas investors are those who approach stocks as if they are buying a piece of business. They study the company thoroughly using their own valuation methods and then invest and hold their positions for as long as possible or as stated by Warren Buffet “I’ll buy a company that I can hold onto forever”, such is their appetite and intelligence when it comes to identifying good businesses.

There are various different methods of investing namely momentum investing, growth investing, index investing etc. But the most intriguing type of investment method is value investment because it may sound simple when someone says “you just have to value a company using certain parameters and hold onto it for a long time” but it isn’t easy. So let’s delve deeper and explore more about it.

What is value investing?
 
Value investing is an altogether a very old school and different approach to investing brought into existence by One of the greatest investors of all time, Benjamin Graham. He was the mentor of warren buffet and author to two of the evergreen bestsellers on Wall Street “Intelligent Investor” and “security analysis”. Although Graham never used the word value investing for his methods, they were termed as value investing by the people who followed him.

In simple words value investing is about purchasing businesses that are selling at a lower rate than your valuation and eventually, the market will correct itself.

But how long will it take for the market to correct itself? Sometimes months and maybe years as well. Value investing does sound like a lot of hard work and patience right? so why should you stick with value investing when there are other more trusted methods being sold out by experts on the wall street after all you often hear how someone doubled or maybe quadrupled their money in a short time. That takes us to our next question, why value investing?

Why value investing?
 
The underlying principle behind value investing is to buy when everyone is selling. Wait, what? Why should I buy when everyone is selling?

Most of the individual investors underperform the stock market because they buy and sell at the wrong time.

Value investors buy when everyone is selling because stock prices may oscillate frequently, but the company fundamentals tends to remain firm and in long term can be predicted if you are capable enough.

If you scrutinize the history of value investors you will find out that they were always one step ahead of the market. While everyone was speculating about how long this bullish trend will last, they were closely studying companies fundamentals and investing according to their valuation.
Warren Buffet, one of the disciples of Benjamin Graham and a value investor as well pulled out of the market just before the recession of 1960. He stated that the market was overheated and companies were overvalued i.e. they were selling more than their worth.

Stock market prices are not in our control but we can analyze the businesses that we can understand and it has been proven that eventually, the market will correct itself. Value investing frees us of the everyday tear and gear of the stock market prices and that is why it’s one of the best investment strategies if someone is interested in creating wealth.

Although a simple approach, most of the people are not able to hold their positions for long-term in a single company. It has been noticed that most of the individual investors sell and buy frequently because they are not confident about their investments. They completely judge their performance based on the stock prices. We should never forget that stock prices are heavily dependent on
investors sentiments and therefore the performance of a portfolio should never be judged in short-term intervals.

The most difficult part about value investing is the discipline that it demands. Imagine the situation, you are heavily invested in a company and according to your valuation, the market will correct itself in long-term. It’s been one year and still, the market hasn’t corrected itself will you be able to hold onto your respective position? It’s very difficult to go against the trend and it has been seen in the portfolio of value investors that it tends to underperform for a certain period, but always rewards them once the market corrects itself.
 
The most alluring part that separates this breed of investors from others is their strong will and the ability to stand against the crowd, to believe in their studies when the market tells otherwise.
 
Most of the great investors have earned their returns by holding their position for years and years in a company. Warren Buffet, Peter Lynch, Rakesh Jhunjhunwala all have one thing in common i.e. They all have held their position in companies that they are heavily invested in for at least 10 years. Value investing has evolved a lot from Graham who used to find cheap stocks to warren buffet whose statement ”It’s better to buy a great company at reasonable prices rather than buying fair companies at cheap prices”. Although the basics still remain the same, never buy overpriced companies and in order to reap benefits you should always hold your positions for long-term Value investing is not a matter of intelligence but more of how strong and disciplined your mind is.