What Is

Value Investing?

 

 

 

IMAGINE YOU’RE GOING TO BUY A CAFE

The cur­rent own­er tells you she wants $1,000,000 for it.

How do you know if that’s a rea­son­able price to pay?

You’ll prob­a­bly look at a num­ber of fac­tors to help you work out how much you think it’s actu­al­ly worth.

  • How much prof­it does the cafe make each year?
  • What kind of assets does the cafe own?
  • What does it have in the way of debts?
  • How long has it been oper­at­ing?
  • Are its prof­its con­sis­tent­ly going up?

Val­ue Invest­ing asks sim­i­lar ques­tions of equi­ties. 

1. VALUE INVESTING IS A MINDSET

 

His­to­ry shows that most peo­ple have no idea how to ratio­nal­ly invest in equi­ties. They tend to make invest­ment deci­sions based on two emo­tions — fear and greed. 

“Did you hear about that hot new tech stock?! It’s gone up 500% in one year!” 

“Bet­ter buy some!”

 As Tony says, that’s not invest­ing, that’s gam­bling.

Reduced to its fun­da­men­tals, val­ue invest­ing is quite sim­ple. It’s about buy­ing shares of com­pa­nies that are tem­porar­i­ly under­val­ued by the mar­ket. The the­o­ry is that if the busi­ness does well, the stock will usu­al­ly fol­low.

 

 

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2. HOW DO YOU FIND UNDERVALUED SHARES?

 

The dis­ci­pline of val­ue invest­ing is to only buy shares that you deem to be tem­porar­i­ly under­val­ued by the mar­ket — and then hold­ing them until the mar­ket catch­es up. Val­ue invest­ing tries to remove the emo­tion involved in buy­ing equi­ties and con­cen­trates only on finan­cial data.

The trick, of course, is know­ing how to val­ue a share.

We are look­ing for com­pa­nies that have a his­to­ry of strong finan­cial per­for­mance (that is, they are con­sis­tent­ly prof­itable) and whose shares are cur­rent­ly trad­ing at a dis­count (that is, the share price does­n’t reflect the actu­al val­ue).

 

 

 

3. SLOW AND STEADY WINS THE RACE

 

His­to­ry shows that stock mar­kets tend to go up about ten per­cent per year on aver­age.

War­ren Buf­fett, has achieved a 19.7 per­cent aver­age annu­al return over 48 years, and con­sid­ers him­self very low risk — one of his most famous say­ings is “Rule No. 1: Nev­er lose mon­ey. Rule No. 2: Nev­er for­get rule No. 1.” So 19–20 per­cent per year seems like a rea­son­able low risk bench­mark to aim for. 

Those kinds of returns aren’t going to make some­one rich quick­ly — but they com­pound over time. Val­ue investors are con­tent to take their low risk 19–20 per­cent annu­al growth and let it com­pound over a long time frame. 

 

 

 

4. HOW DO I LEARN VALUE INVESTING?

 

A good place to start would be to read the books list­ed here. 

The QAV Val­ue Invest­ing check­list is the result of Tony’s study of the world’s best val­ue investors over 25 years. It’s his quick way of assess­ing the qual­i­ty and val­ue of com­pa­nies on the ASX (the Aus­tralian Stock Exchange) but the same process works on oth­er exchanges. We know of peo­ple using our check­list in the USA, Cana­da, New Zealand and Switzer­land. 

If you want to learn how to use it prop­er­ly, check out the first cou­ple of episodes of our pop­u­lar Aus­tralian invest­ing pod­cast. 

 

 

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