posted by on Jun 24
Now I’m sure you’ve all heard people coin the term “Value Investing.” And that this is what many successful investors such as Warren Buffett have used in order to build immense fortunes. It must be good because one man has generated a fortune large enough to become the richest man on Earth. However, what I tend to find is that many people have different ways (and in many cases incorrect ways) of defining and explaining what value investing is. And if you have no idea what it is in the first place, then you will only more confused. For that reason, I have decided to clear the issue up in his article.
In simple terms, value investing is basically the financially rewarding quest to buy a dollar’s worth of assets for less than a dollar. In other words, purchase a stock and/or commodity for less than what it’s really worth. It’s just like going from shop to shop looking for a bargain and pouncing upon it because you think the price is less than what the product is really worth. Sound simple enough? Well, there’s a bit more to it.
The problem is that the worth of different stocks and/or commodities are different to everyone. What may be worth $10 to one person may only be worth $1 to another. Now how do you value a stock or commodity as objectively as possible? There are various ways of doing this. But a good start would be to follow Warren Buffett’s methodology, which everyone agrees, have proven hugely successful.
Now I cannot and will not go through his whole methodology in this article, however, it will also be explained in future articles. But I would like to highlight one interesting and important facet of his methodology. It’s the fact that he NEVER invests in stocks that solely rely on a commodity such as oil and gas. Why? Firstly, commodities always go up and down in price and hence earnings growth cannot be guaranteed. Secondly, all companies that rely on commodities are pretty much identical, meaning that there is a lot of competition and hence they can lose market share. If there’s the possibility of losing market share, why invest in it for the long term?
Future articles will address other parts of his methodology to help you take advantage of this powerful weapon that is Value Investing. Keep an eye out for them.
