Friday, May 9, 2008

Basics of Investing - Part I


Value investing is an investment strategy derived from the ideas on investment by Ben Graham & David Dodd. Graham’s book, The Intelligent Investor explains his concept in detail to average people like you and me.

Why should I bother about what Graham talks about? Well, there is one very good reason!


Who is Warren Buffett?
Warren Edward Buffett is regarded as one of the world's greatest stock market investors, and is the largest shareholder and CEO of Berkshire Hathaway With an estimated net worth of around USD62 billion, he was ranked by Forbes as the richest person in the world as of February 11, 2008.
[Extracted from Wikipedia @ 9 May 2008]

Warren Buffett is the most notable proponent of value investing. And if you wish to invest in shares and want to be successful doing it, why not learn from the very best?

What is Value Investing?
In simple words, value investing is about the WORTH of a company. Instead of thinking of a company as an inanimate object, why NOT consider a company as a real living sentient being?

Let’s consider the value of a person. As a baby, when he comes into this world, he may have great potential. However, before this person becomes a person of value and contribute to the world, it will take time.

He will need to go to school to be educated. After facing the trials of examinations in primary, secondary and tertiary education, he has to embark on his working or entrepreneurial life. He will face all manners of challenges, trials and tribulations. If he rises up to the challenges in life, he will grow in value as a person. Soon, he will be a person of value and be able to contribute to his family and society in general.

The same applies to a company. Before you invest in any company, you must first understand the value proposition a company brings. Just like a person, to truly value and comprehend the company: you must first know:

(a) it’s origin, the past challenges and tribulations endured by the company (PAST);
(b) who is its' current leaders, the current company corporate culture and its' competitive advantages (PRESENT); and
(c) its' future vision, hope and aspirations (FUTURE).

Only by performing extensive research and analysis on your own, can you thoroughly appreciate the value of a company.

Why is this relevant?
If you truly recognize the TRUE (or INTRINSIC) VALUE of a company’s share price: you can compare it to the stock market’s share price. If your assessment of the value of Company A share price is RM10 and the stock market share price is only RM6, then it’s time for you to buy the shares of Company A. Sooner or later, other people are going to realize the same thing as you, and you can make a handsome gain of RM4 per share (40% capital gain), probably within one to two years.

You need to truly comprehend the value or worth the company you are planning to invest it. Compare the real worth of Company's A shares to the its' current stock market price. If the market price of Company A drops below its' intrinsic value, then it’s time to buy the shares in Company A.

So, how do we assess the real value of a Company? This will be covered in my future posts.


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