Value investing made simple: Here I write about great ideas from Warren Buffett, and share some ideas about making money on the stock market. Let me share some great investment ideas and concepts of value investment from the famous Buffett with you:
1. Many people buy stocks and see them as pieces of paper that give dividends or capital appreciation. Yes, that is actually what stocks are, but Warren Buffett suggests a different approach. Why not see stocks as parts of businesses? Every stock certificate is linked to a company. Stocks are indeed linked to businesses, and the prices of the paper stem from the businesses. This key insight means that the stocks yield money when the businesses are healthy. You can therefore make investment decisions by asking the following questions:
Is there a market for the product? Is the particular company doing well now and does it seem likely to do well in the future? Is the company under good management, or are the people in control known for not being trustworthy?
Simply put: see the stocks as linked to businesses, and apply fundamental analysis to make money on the stock market. Warren Buffett reads a lot of annual reports and therefore he makes a lot of money when the decisions turn out right.
2. Use market fluctuations to your own personal advantage to make money in the stock market. This is a great idea. Warren Buffett and Ben Graham often talk about Mr Market. This is an allegory. It goes like this: A man called Mr Market turns up every day and quotes prices. He is basically a price quoter and does nothing but quote prices, and you must decide whether to buy or to sell. Market fluctuations therefore help you if you can sell to Mr Market when he quotes high and buy from him when he quotes low. Mr Market is occasionally optimistic and then again sometimes pessimistic, but as long as you buy and sell at the right prices, there is no need to worry because you will make money. Why? … because you are able to profit from folly and profit from market fluctuations.
3. Another metaphor here : Warren Buffett once mentioned a bridge and suggested that you do not drive heavy trucks over a bridge meant for heavy loads, but rather, you drive light trucks over a bridge that can bear more load. This is the idea of margin of safety. This is also a key concept: the margin of safety in investment.
Another way of looking at it would be: it’s better to buy a dollar for 40 cents than it is to buy a dollar for 70 cents. This enables you to make money. The key learning point is this: We learn the value approach. Just as we do not want to fall over a precipice by driving a heavy truck over a bridge, and just as we want to make money by buying dollars cheap, we should do the same for stock investments. We should have a margin of safety.
4. Last but not least, use common sense. This is a great idea but may prove harder than the more technical aspects of value investing, like margin of safety and fundamental analysis, and other elements of Buffett’s system. The reason is that this needs to come via experience. Diversification may not be a good idea if you know what you are doing, but if you don’t then diversification might save you. That kind of common sense is sometimes counterintuitive and may take some time to acquire.
What have we learnt here in this short article on value investing?
Don’t see stocks as paper!
Profit from folly; don’t join in!
Always have a margin of safety.
Use your investment common sense.
Hope you glean several insights from this article. Thanks for reading and cheers!