Principles of Value Investing
Value investing begins by asking the right questions when deciding whether to put your money into the stock market.
Most people go for short term gain without any fundamental strategies. You can tell by the questions they ask which ultimately affects their decisions.
They ask things like which stock is going to fly or take brokers’ recommendations. They do not do their own study because they really have no idea how to do it. They hear people bragging about how much fortune they made in the stock market and become greedy. So they enter the market based on tips, news and speculation.
In Value Investing, we make our decisions from a Business Point of View. We only buy a business when it makes business sense to do so.
In the stock market, there are types of business for purchase – Healthy and Sickly Business. Healthy businesses are the businesses that are healthy. They perform well and earn good consistent profits for its owners. Sickly businesses are businesses that produce sickly profits. The profits are erratic and poor.
And when both businesses fall ill in bad times, their price will fall. The trick is to buy healthy businesses at low prices during this time. Healthy businesses have a good chance to recover while sickly businesses have lesser chance to recover. And when healthy businesses recover, they will continue to perform and earn good profits for the owners.
Sickly businesses on the other hand may not recover from bad times. Even if they recover, they will continue to be sickly and produce sickly results.
The ability to differentiate the 2 types of businesses will determine your ability to earn huge profits from business acquisition.
We can start by understanding some basics of the business world.
The first thing to understand is that all businesses are in business because of their ability to provide value to customers who are willing to pay for the value.
Some examples can be basic needs like food, clothes to luxury items like jewellery.
However, we can see that the world of business, competition is stiff, causing many businesses to die off. These businesses are what we mentioned, Sickly Businesses.
On the other hand, there are businesses that are able to survive and thrive through these competitions. These are Healthy Businesses.
They are able to do so because of what we call a “Competitive Advantage”. They have a “unique advantage” that allows customers to keep going back and at the same time keeps rivals out. We also call this an Economic Moat.
A Moat:
In the olden days where castles are built and occupied, a moat is a deep, broad ditch, either dry or filled with water that surrounds a castle, building or town, historically to provide it with a preliminary line of defence.
An Economic Moat:
Of course, the Moat we are talking about is an Analogy that describes how Modern day business protects itself against its rivals. This is also known as the business’s Competitive Advantage. It is an advantage that is not duplicable by its rivals and therefore keeps out competitive or allows it to survive and thrive in face of competition.
And figuratively speaking, the wider the moat, the stronger the business.
In my next postings, I will share some common methods to discover these moats.
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