What is value investing?

KNOW THE TRUTH ABOUT VALUE INVESTING 

So you are planning to start investing but do not know where to start? Maybe you have heard about a style of investing called value investing and you do not know what does it mean?

Congratulations on taking the first step to take control of your financial future. Value investing might be the key toward your financial freedom. Welcome to Investing 101: What Is Value Investing?

Value investing is a philosophy of investing, first popularised by the mentor of Warren Buffett, Benjamin Graham. Many see the stock market as just a huge casino with speculators trading in and out of a stock.

However, value investing is about learning to see the real company behind the stock ticker and understanding the business.

Here are some key concepts of value investing.

THE TICKER IS A BUSINESS

Instead of seeing a stock ticker as just an instrument for us to speculate, we should see it as a company. When we are buying shares of a company, we are buying a part-ownership of a business. This makes us a partner of the company.

This means that we should at least learn about the business we are investing in. For example, when we are investing into China Mobile, we are not just buying a stock ticker, 0941.hk, we are investing in one of China's largest telecommunication companies.

We are taking part in its future growth and earnings as part-owner of the business.

EVERY BUSINESS HAS A VALUE 

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Once we are able to see each stock as an investment in a company, we have to know that each company would have a value, called the intrinsic value. The intrinsic value of a company is different from the share price of the company.

The share price of the company is just the current market's opinion of the company while an intrinsic value is an estimation of the true worth of the business.

As a value investor, your job is to find a company you like to invest in and buy it at a share price much lower than your estimation of the company's intrinsic value.

For example, you might estimate the intrinsic value of Petronas Chemical Berhad as RM10.00 (S$3.29) per share while the company's share price is just trading at RM7.50 per share. In theory, if you invest in the company, you will be buying an asset worth RM10.00 at just RM7.50, a discount of 33 per cent!

THE MARKET IS IRRATIONAL

The market is made up of millions of participants and sometimes the market can be guided by crowd psychology. This means that there might be times where the market is overly optimistic (during a bubble) or overly pessimistic (during a crisis).

We must know that market can act irrationally from time to time. Value investors should be able to recognise that and be able to take advantage of the market by:

• Selling when the market is too optimistic
• Buying when the market is too pessimistic

This article was first published in Value Invest Asia. All content is displayed for general information purposes only and does not constitute professional financial advice.