I can only tell you that the secret has been out for 50 years, ever since Ben Graham and Dave Dodd wrote Security Analysis, yet I have seen no trend toward value investing in the 35 years that I’ve practiced it. – Warren Buffett, who became a billionaire through stock market investing
You may not have heard of this because it’s unpopular. Anyway, let me tell you an analogy.
In a commercial, Bimby asks his mom Kris Aquino, “What is sulit mommy?” Kris answers, “It’s getting more what you pay for.” That’s what value investing is.
According to some literatures, it is an investment style that evaluates stocks based on their business performance and buying such at discounted prices.
Value investing is how Warren Buffett makes his billions of dollars.
Despite his record, sadly the so-called experts in the market advocate technical analysis and other non-business related study; and people listen to them thinking that they’re the best way to make money. Indeed they’re the fastest and easiest ways to make money, for stockbrokers.
What makes value investing unpopular?
Value investing basically involves analysis of the business’ financial statements and see whether the current price is cheap or expensive.
It looks at the balance sheet, income statement, and cash flow statement to see whether the company is performing better compared to its competitors.
The problem now is, most of us don’t have accounting background. Since accounting is hard, many yield to technical analysis or rumors. It’s an analysis based on chart formation, volumes traded, and other non-business performance study. Easy.
But here is what I learned from Warren. If we want to be a better investor, we need to have basic knowledge of accounting, for it is the language of business. Numbers. We need to know some metrics to determine which company is the most profitable than others.
I did not major accounting. I majored philosophy. I took accounting subjects only during my postgraduate studies. But just the basics. And the good news is, we don’t have to be an accountant to be successful in the stock market. Thank goodness.
There are some basic metrics though that we have to learn. In analyzing a business, I learned to look first at the statement of cash flow, especially the cash flow from operations. It shows how much cash goes in and out of the business out of its operation.
If in the last three years it is positive and increasing, it’s a good sign. I then take a look at its return on equity (ROE), profit margin, and other basic metrics. Then, I compare it with the current price.
It took me long and hard time what to look for in studying business performance. Now you have a clue.
Doing this kind of analysis takes a lot of reading. For someone who works from 8 to 5 daily, he may have hard time inserting reading and analyzing stocks into his schedule. Consequently, most have the tendency to listen to rumors and tips.
But doing so could ruin your financial life. If your economic life is at stake, would you want it to be dependent on rumors and tips? Don’t do it. Warren Buffett says, “A public opinion poll is no substitute for thought.”
Further, a friend of mine told me one time that he is not read-type of person. If he sees that the book is bulky, he won’t touch it. Most of us are like that.
Warren Buffett reads every page of the annual report of the company that he is interested in. I don’t do it because I can’t do it. Once I start reading, the pages eventually becomes sleeping pills.
Here is what I do. When I am curious about a company, as I mentioned above, I take a look first at the statement of cash flow. If I don’t like the numbers in the cash flow from operations, I discard the annual report.
If I am impressed, I then take a look at the other statements and read some parts of the annual reports. That way I save a lot of time. I simply don’t have all the time in this world.
If you don’t like to read, you can consult Mr. Youtube. He has a lot of materials about value investing.
In an environment that is dominated by those who have short-term orientation, long-term view is extinct. Investing based on the longstanding performance of the business is seldom discussed in investors’ gatherings.
Most people in the stock market like to trade rather. They want to buy now and sell a bit later. It is obvious in the movement of the chart in a day’s trading. It goes up and suddenly goes down, and vice versa.
Moreover, many are short-sighted and fascinated with short-term gains. All they want is to make a quick profit. It’s like everyone is in a hurry to be wealthy. Long-term investing is boring for them.
Warren Buffett compares these people as those who like one-night stand and call such affair as romantic.
However, as what an article I recently read says, it takes time to build wealth. True. Big money easily acquired slips easily as well.
Remember that over time, as records show, profitable businesses become more valuable; in which case, their stock prices in the market will eventually follow.
If you invest for the long term in profitable companies, you will just be surprised one day how your money has grown.
It’s like working abroad for how many years and once you come home, you’ll be surprised how your children have grown up.
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