Lecture Notes: Introduction to Value Investing

Objectives

1. Understand the difference between value trading and value investing.
2. Identify the difference between an asset and a liability.
3. Learn about the origin and practice of value investing.

Key Concepts

Kyle McDonald's Experiment

• One Red Paperclip Experiment:
  • Started with a paperclip, aimed to trade up in value.
  • Traded paperclip for a fish pen, fish pen for a doorknob, etc.
  • Ended with a house within a year to a year and a half.

Value Trading vs. Value Investing

• Value Trading:

  • Trading items with the hope of increasing their value.
  • No intrinsic value growth while holding the items (e.g., fish pen value doesn't increase over time).

• Value Investing:

  • Involves holding assets that appreciate over time.
  • Assets have intrinsic value that can grow, providing returns over time.

Assets vs. Liabilities

• Assets:

  • Items that put money into your pocket over time.
  • Examples: Apartment buildings, patents.
  • Maintain or grow in value, providing income.

• Liabilities:

  • Items that take money out of your pocket.
  • Examples: Cars (depreciate in value, require payments).
  • Reduce wealth by incurring ongoing costs.

Wealth Accumulation

• Wealthy Individuals:

  • Accumulate assets, minimize liabilities.
  • Focus on increasing income through asset ownership.

• Characteristics of Non-Wealthy Individuals:

  • Rely on job as sole asset.
  • Accumulate liabilities, reducing financial growth potential.

Value Investing Process

• Example: Warren Buffett

  • Analyzes financial information of companies (e.g., See's Candy).
  • Determines intrinsic value ($40/share) and market price ($30/share).
  • Buys undervalued shares, earning returns as value grows.

• Warren Buffett's Approach:

  • Focuses on intrinsic value, not just market price.
  • Learns from Benjamin Graham, the godfather of value investing.

Educational Resources

• Benjamin Graham's Books:

  • "Security Analysis" and "The Intelligent Investor"
  • Known for laying the foundation of value investing.

• Buffett's Books Website:

  • Aimed at simplifying complex investment concepts from Graham's books.
  • Interactive learning to understand value investing principles.

Key Terms Learned

• Value Investing
• Assets and Liabilities
• Intrinsic Value

Additional Resources

• Kyle McDonald's Book: Available for purchase on Amazon.

These notes summarize the key points from the introductory lecture on value investing. They cover the fundamental differences between trading and investing, the importance of assets over liabilities, and how value investing is applied in real-world scenarios as demonstrated by Warren Buffett.