Value investing

My dear friends, value investing is by far the best method of investing known out of the many other methods of investing. However, value investors are but a minority few of the whole population of investors. Value investing beats the market over a time horizon of a year, 3 years, 5 years and the longer term. But still so few people are attracted to it. You may be asking why is such a successful method not followed by many people. There are many reasons. But I would attribute the main reason to the personalities of investor. Value investing is simple, yet demands huge discipline and steadfastness that many investors lack in the event of a panic.

The main idea to value investing is to buy stocks that are undervalued. In doing so, investors and analysts seek to find out the true value of a share of a company, that is, its intrinsic value. Pioneered by the late Benjamin Graham, when in 1934 he published his book Security Analysis that marked the beginning of a new study. Graham himself was a successful investor. He was the lecturer at University of Columbia in the area of Finance. And throughout his career there, he studied securities extensively, producing only the most stunning commonsense approach towards investing. During the great crash of 1929, he was one of the few to survive it based on his methods alone.

His philosophy was followed by Warren Buffett, his most excellent-performing student of all of them. From a nobody, Warren has managed to become the world's 2nd richest man starting from Graham's principles of value investing and later in his career forming an investment style of his own. Warren strictly bought securities that were undervalued and in many times when it was overvalued, he would simply say no.

Value investing is also about looking for businesses which has a sustainable competitive advantage. Those words can be broken up into two, sustainable and competitive advantage. A competitive advantage is when a company operating in a market has a niche and can achieve above average profits for an extended time. This could be because of a powerful brand, consumer loyalty towards its franchise or a product everyone knows, such as Coca-Cola.

But value investors look not just for a competitive advantage but a sustainable competitive advantage. When a business enjoys nice profits and is prospering, many other competitors would like to enter the industry. When they do, competition intensifies and the prospering firm slowly loses its profits. More firms will enter the industry and the profits of the company slowly erodes until the money earned just equals the cost of the business. In other words, profits equals zero. This is assuming a level playing ground for the firms. So what does the firm have that can ensure its competitive advantage stays there, in other words sustainable? That, my friend, is the task of the value investor to find out.

This is but a tip of an iceberg which belongs to the field of value investing. It certainly has made people alot of money by just sticking to this method and following it through thick and thin. This will be volume one of series one of value investing. Till the next time I update about Value Investing: The Series.