This article is intended as an introduction to 'Value Investing'.
If you go back over 100 years or so, there was no such thing as 'Value Investing'.
It hadn't been "discovered."
Way back then, speculators in the market used to buy on good news and sell when there was a sniff of bad. If their investment didn't move after a few months they would sell and move on to another stock.
Big players back then, were Jesse Livermore, James Keene, Bernard Baruch, and a few other 'Stock Trading Legends'.
They weren't really scientific investors, they were what we would call them today - speculators. They drove the markets up. Sometimes beyond realistic.
Proof of such unrealistic growth came in 1929 with the great Stock Market Crash.
A lot of these speculators got more than their pinkies burned.
Then, in the early 1930's, just as in many a crisis, along comes a man with something different. His name, Benjamin Graham (That's his mugshot over to the left).
And that something different was the birth of 'Value Investing'.
After the 1929 Stock Market Crash, in the early1930s, Benjamin Graham noticed that top notch investors of the time didn't care about the long-term prospects of the companies that they were "speculating" in.
Graham noticed that when good companies hit a low they were selling below their long-term intrinsic value and that if he bought at these bargain prices he would sell and make profits.
But Benjamin Graham didn't really care about the businesses he was buying. Every company had a price level at which it was a bargain.
Warren Buffett, by contrast, does care about the type of business he buys. He will not invest in a company if he doesn't understand it.
And as you will soon see, Buffett was different to Graham.
The term "Value Investing" comes from Benjamin Graham looking for companies that were trading for half of what the company held in cash. He termed this: 'buying a dollar for 60c.'
Graham had this "50 per cent" rule. If a share moved up 50% from what he bought it at, he would sell.
Buffett however, became fundamentally different.
He didn't like Graham's 50% rule. His reasoning was that if a company had a competitive advantage all well and good. On this, he agreed with Graham.
But Buffett went a step further by identifying that a company always had this advantage and that advantage would continue, for the foreseeable future.
When Warren Buffett was employed in the offices of Benjamin Graham in New York he worked with a guy named Walter Schloss. And from what we can conjecture, it was Walter Schloss that drummed into Buffett how to read Financial Statements.
Walter Schloss had the young Warren Buffett pore over hundreds and hundreds of company reports.
It was during this time that Buffett discovered (or was taught by Schloss) that companies that had a competitive advantage, and held that advantage into the future, were the ones to pick out.
And so it was. Warren Buffett just about dedicated his life's work to sussing out which companies stood out. In time, he developed a set of tools to help him identify these kind of businesses.
Warren Buffett then set himself the task of answering two questions:
1. How to identify these kind of companies and
2. How to value this kind of company
And once done, would invest in these companies and hold them long-term, in reality, forever.
His philosophy was that because he had really done his homework on these companies that there was a nigh on zero chance of them ever going bankrupt. He reasoned that the lower the market drove such share prices, the cheaper they became.
History, of course, has proved him 100% correct.
If you have read the section Durable Competitive Advantage, then you already have a head start in understanding Warren Buffett's type of company.
If not, then here's a re-cap.
These type of companies come in three different shapes and sizes:
1. they sell a unique product
2. they sell a unique service
3. they are low-cost buyers and sellers of a product that is constantly in need
If you stop to think for a moment just what Warren Buffett is thinking here. The words 'Durable Competitive Advantage' the way we see it describes quite nicely the type of company that falls into the category of 'Value Investing'.
Durable means that the product or service that they provide will be for the long term. And we know that Warren Buffett wants that.
Competitive means that the company maybe does have others in its field but that word 'Advantage' means to us that, OK, there may be others in the same field but our company has the edge - for one reason or another.
That edge may be branding. It may be price. It may be cost of production. It could be any manner of things but our company has it, and is likely to have it for a long time to come. And if it's price, that doesn't always mean cheaper. The company may be able to sell more expensive than its competitors because it is recognised as "the best."
A good example of this would be Coca-Cola.
A good example of a company with a unique service would be Wells Fargo or American Express.
And an outstanding example of a company that is a low-cost buyer and seller could be Wall-Mart.
As this website evolves, we'll try to demonstrate the types of companies that fit the bill. For now, it's probably a good idea to just grab the concept of 'Value Investing'.
Then, when you come across such a company, you know what to do. Buy it, and think long-term. That doesn't necessarily mean buy it and hold it come what may. What it means is, buy it when it's a bargain and sell it when it becomes expensive.
Then, put it on your watchlist, and buy it again when it becomes cheap. Rinse and repeat.
Warren Buffett didn't call these type of companies "durable" by accident. He chose his words very well indeed. He didn't try to hide anything, nothing was coded.
Of course, he's a lot cleverer than us. He's also a hell of lot richer than us. And for good reason. He started long ago, identified his market, and exercised a good dollop of patience. Something most of us don't have. But you have to learn to be patient.
If you're young enough, you can do it.
So where does Warren get all his info from?
So where does Warren Buffett go to get all his information?
And what does he do with it when he gets it? i.e. what is he looking for?
He pores over company 'Financial Statements' and looks for companies that have high margins, good profits, companies that have little or no debt, companies whose earnings grow year after year?
He looks for all the above, and more besides.
Remember, you DO NOT have to be Warren Buffett. All this website is trying to do is give you an appreciation of what to look for. You don't do any of the grunt work, other than seek out the information.
As well as these web pages on 'Value Investing', there are pages about 'Financial Ratios' that are considered in detail. Of course, there is an overlap. But if you read all there is on this website, you should gain a pretty good idea of what to look for.
O.K. Back to 'Financial Statements' ...
Generally, for our understanding, they are in three parts:
The first part of a company's 'Financial Statement' is the 'Income Statement'.
This tells us how much the company has earned over a period of time. From this, various 'Financial Ratios' can be calculated. (The 'Income Statement' is sometimes referred to as 'Profit and Loss').
Next, comes the company 'Balance Sheet'.
This shows how much money the company has and how much money it owes.
And lastly, comes 'The Cash Flow Statement'.
This shows the amount of cash that flows in and out of the company.
All three components of the 'Financial Statement' reveal something about the company. The 'Financial Ratios' derived from these statements (or indicators as they may sometimes be called) are generally all done for us (so we don't have to calculate them for ourselves).
The webpage the Income Statement is the next one you should read, followed by the Balance Sheet.
And finally devour: the Cash Flow Statement
There are literally dozens of books on the subject of Value Investing. We have endeavoured to pick out what we feel are "on topic".
Value Investing From Graham to Buffett and Beyond by Bruce Greenwald
Benjamin Graham taught Value Investing to all of his students - Warren Buffett being one of his stars. In fact, the final Part (III) of this resource details how 8 successful value investors put the principle into practice. Among these eight are: Warren Buffett, Mario Gabelli, Walter and Edwin Schloss, and Paul Sonkin.
The book is ideal for private investors. Part I starting with the basics and Part II detailing sources of value.
If you want to emulate the Warren Buffetts of this world, this is an ideal resource for you.
Probably the best known book on Value Investing, click the link below to get your copy:
Value Investing Made Easy by Janet Lowe
This is a paperback version of a classic work on Value Investing.
For over 60 years Graham's secrets were restricted to a chosen few - the Warren Buffett's of this world.
Lowe has whittled Graham's technique down to a trading strategy that
every investor can make use of.
Click the link below to get your hands on a copy:
The Intelligent Investor by Benjamin Graham
This is where Benjamin Graham revolutionised investing by 'discovering' his 'Value Investing' theory.
He had a star pupil in Warren Buffett who we know has gone on to become one of the world's richest people - all through Value Investing. Phenomenal!
Being honest, this is a 'heavy' read, but a useful one. Our copy serves as a great reference. You can obtain your copy right here:
This book should be on every investor's bookshelf, get yours right here:
The Intelligent Investor Summary by Preston Pysh
If the full version of the book is too much for you, or you just want a precis, this is for you.
Click the link below to be sure of your copy:
Applied Value Investing by Joseph Calandro
There hve been many books published about Benjamin Graham's approach to investing i.e. Value Investing, but 'Applied Value Investing' is right up there with the best of them.
This book takes a similar path as 'Security Analysis' did. Nothing beats Graham and dodd's tome, but 'Applied Value Investing' offers something more. The book covers several cas studies which are always relateable.
One such case study details the acquisitions, by Warren Buffett, of GEICO and General Reinsurance. The book contains many other case studies.
Great book. Get yours right here:
Strategic Value Investing by Stephen Horan
Reserve your copy by clicking the link below:
The Little Book of Value Investing by Christopher H. Browne
Christopher Browne explains the art of Value Investing in plain language. He defines it as buying company stock for less than their intrinsic value and likens it to buying $1 for 66 cents.
Who wouldn't do that?
As well as showing you how to find value stocks he has a 16-point checklist that ensures you stay on track and away from what he calls: "fleeting fads."
This series of books are delightful. We have 'em all. Get your copy of this one by clicking the link below:
Warren Buffett Accounting by Stig Brodersen and Preston Pysh
Grab your copy. Click the link below:
Wisdom on Value Investing by Gabriel Wisdom
By an author who knows her onions. Click below and get yourself a copy:
The Warren Buffett Way by Robert G. Hagstrom
In this book the author wonders why, with so much information about the techniques of Warren Buffett available, do so many investors fail to emulate him.
Robert Hagstrom attempts to point out reasons why Warren Buffett is super-rich and everyone who attempts to copy him do not come close.
In the introduction Howard Marks cites several reasons why Buffett is "different." A couple of these reasons are that Buffett is unemotional, contrarian, and extremely patient.
book details 9 case studies of Buffett's prior investments. Another
chapter details 12 immutable tenets, and another chapter defines the man
himself. A whole chapter is dedicated to how he was educated ranging
from his early association with Benjamin Graham and Philip Fisher to his
partnership with Charlie Munger.
One of many books on Warren Buffett. Take a look at some of the others as well. But get this one by clicking the link below:
It all sounds super simple. It probably is for someone like Warren Buffett. But for us mere mortals we need it spelling out.
For sure, we don't want to pore over company accounts, we're just not qualified to do that sort of thing. But we are, and so are you, competent enough to understand all the grunt work that professionals have done for us.
The first thing we did when we started studying this subject was to read as much as we could get our hands on. Start with reading about Stock Trading Legends and progress on to books about Warren Buffett. If nothing else - they are entertaining.
Get familiar with Financial Ratios, Income Statements, Balance Sheets, and Cash Flow Statements, from the point of view that they contain all the ratios you will probably need.
Pick a company share that you think may fit the bill.
Browse the books recommended on this web page, there are plenty of choices. It's a big topic and an important one.
Use some Stock Trading Software to analyse your information and when you find a company share that ticks all the boxes, put that on your watchlist.
Use Technical Analysis to highlight a buying opportunity for that stock.