Overview
This lecture explains the concept of value investing in five progressive levels of complexity, highlighting its principles, strategies, and key concepts.
Introduction to Value Investing
- Value investing is a proven investment philosophy focused on buying assets below their intrinsic value.
- Famous successful value investors include Warren Buffett, Palo Kenhong, and others.
- The goal is to purchase undervalued assets and sell when their prices return to fair value.
Level 1: Basic Concept
- Value investing is like bargaining for a house below market price.
- Investors identify the true value of an asset and buy when the price is lower.
- Selling occurs when the asset price rises to or above its fair value.
- Patience and discipline are crucial, as good deals are not always available.
Level 2: For Beginners
- Cheap assets are those with strong cash flow relative to price (earnings yield or PER).
- Compare returns from different assets using metrics like Price to Earnings Ratio (PER).
- Investors should seek assets generating high cash flow for their price.
Level 3: For Average Investors
- The value of cash today is greater than future cash, due to time value of money.
- Discounted Cash Flow (DCF) analysis estimates asset value using expected future cash flows discounted to present.
- Higher discount rates apply to riskier businesses.
- True bargains should be obvious, not just the result of complex calculations.
Level 4: For Advanced Investors
- Risk in value investing includes business risk, overpaying, and personal reaction to price drops.
- Margin of safety means buying well below estimated fair value to protect against error.
- Qualitative analysis (like management and competition) is as important as numbers.
Level 5: For Expert Investors
- The best companies rarely trade at a significant discount; bargains are often in unloved or ignored stocks.
- Look for assets with low valuations due to temporary issues, sector cycles, or market neglect.
- It’s vital to distinguish between temporary and permanent declines in fundamentals.
- Continuous learning, reading, and engaging with investment communities are recommended.
Key Terms & Definitions
- Value Investing — Strategy of buying undervalued assets and selling when they reach fair value.
- Intrinsic Value — The true, underlying worth of an asset based on fundamentals.
- Margin of Safety — Buying with a significant discount to intrinsic value to minimize risk.
- Discounted Cash Flow (DCF) — A method for valuing assets by discounting their expected future cash flows.
- Price to Earnings Ratio (PER or PE) — Price of a stock divided by its earnings per share; a measure of valuation.
- Earnings Yield — Earnings per price; the inverse of the PE ratio.
Action Items / Next Steps
- Study financial reports and key investment books for deeper understanding.
- Watch educational investment content on recommended YouTube channels.
- Engage in investment communities for discussion and support.
- Practice identifying undervalued assets using discussed metrics and concepts.