What are the things that stand between you and successful Investing?
The periscope of Value Investing starts with three most important Pillars of Value Investing.
The reason why we landed to value investing; we don’t want to lose money, “[V]alue investing makes sure either head or tails we win”, we as value investor give important to capital over anything else.
When we talk about Value Investing, I can presume you want to get rich but not at the cost of capital. You understand that value investing takes time, and you have to nurture your investments.
Picking of stock based on value investing differs from person to person, but out of all the concepts, the three most important aspect of value investing laid down by value investing guru himself Benjamin Graham. This includes the Legendary investor Warren Buffet who followed Benjamin Graham pillars of value investing.
Whether you’re a professional or just getting started, this would give you the framework to getting started. At times even the professional investors and trader miss these fundamentals of value investing.
This is the not the most important aspect of value investing. You have to be smart to implement. Benjamin Graham who is often referred as the Father of Value Investing, in his book The Intelligent Investor and Security Analysis. He merely believed that buying a solid business at a discount value to their intrinsic value.
The book in total mentions five Pillars of Value Investing whereas in this post we are going to discuss the three most important pillars of value investing.
The 5 Pillars of Value Investing are:
- The Business
- Intrinsic Value
- Mr Market
- Circle of Competence
- Margin of Safety
CIRCLE OF COMPETENCE
This the most important aspect of value investing to stay put in the circle of competence. You would have gained expertise and knowledge of specific sector and industries. You just have to stick to those. You would broaden your knowledge horizon as you read but when it comes to picking up opportunities in the stock market, you should only consider opportunities in which you have expertise.
In a recent conference, Rajiv Bajaj was asked, “[W]hy don’t you start manufacturing scooters also since it is similar to bike it has more or less the same framework”; Rajiv Bajaj answered, ” It does not work that way, this is something similar to asking Sachin to Play baseball since even that has a bat and a ball, […], market opportunities[…].
If you carefully follow the investments of Berkshire you would realise how rigorously circle of competence was given importance, he had quoted, ““One of the things we try very hard to do at Berkshire, is to stay within what I call our circle of competence”; you would also find being a very close friend of Bill Gates he rarely investment in Microsoft or another technology companies.
You always have the opportunity to expand your circle of competence but never invest in opportunities outside your circle of competence. It is straightforward,” do what you are best at”; hence smart people usually know their circle of competence and stay within this. This is the First important pillar of value investing.
My favourite question to most people to whom I address, ” Difference between Price & Value?” and the answers I get are amazing.
You have analysed a company and conclude that this company is worth Rs. 10 Lakh. Now, if the market is pleased he will take the price of the company to Rs. 1 Crore, at the same time if he is not happy he would bring that down to Rs. Ten Thousand.
Now it’s a no-brainer to me if you value a company at Rs. Ten Lakh and the market says Rs. One Crore, or if the market tells Rs. Ten Thousand decision is yours. It is for you to understand when to enter, exit and stay in the stock market.
It was right said, “Benjamin Graham — ‘In the short run, a market is a voting machine, but in the long run, it is a weighing machine.’
Stock Exchange or Market primary role is to facilitate you to buy and sell stock not to instruct you what should be done. This forms the second important pillar to value investing.
Smart people just understand this and know what should be done to take advantage of.
MARGIN OF SAFETY
Looking for an opportunity for a sale is naive, you keep your purchase price so high that even a mediocre sale make it very attractive.
“If you are climbing inside your house with the help of a rope which can hold only 60Kgs whereas you are weighing 75Kgs you will not look out for another rope, at the same time when you are climbing the Himalayan mountain you would take a rope which can at least hold 300kgs.”
You determine the margin of safety from the purchase price of the stock you make. Business and Intrinsic value are used to understand the value of the business. In the above case, we assumed that the business is worth Rs. Ten Lakhs.
The Margin of Safety in absolute terms is the difference between Intrinsic Value and the Market Price of the company. In the above case if the market price of the company is Rs. Seven Lakhs and Intrinsic value is Rs. Ten Lakhs then, in this case, your margin of safety is Rs. 3 Lakhs. This is the last important point to a pillar of value investing.
Ideally, the margin of safety should be more than 30%.
Choose your stock selection strategy wisely.
At the end, it is what you want to purchase and how you purchase it.
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