As the expression ‘there’s more than one way to skin a cat’ goes, equally, there are many different ways to approach investing.
In broad terms these can be split into the following categories: Value, Growth, Quality, Momentum and Income. Although each approach shares some disciplines it is worth taking a closer look at some of the key rules of each. In this edition of Sharp Insight, we look at Value Investing.
Simple…. but not easy…
The good news is that Value Investing is simple. The bad news is that it is not easy and that’s because it runs against almost all human instincts. Who wants to hold the bombed-out engineering stock when everyone is buying the fast-growing technology stock?
What are the rules?
- Price is not value – this is the concept that the market price does not necessarily reflect the value – bargains exist.
- The market is a bit crazy – it can swing from delirious enthusiasm to sickening gloom.
- Companies have an ‘intrinsic value’ – there are multiple conflicting ideas on how to calculate the ‘intrinsic value’ but the principle is the key, not the method.
- Margin of Safety – only buy a stock if it is below its intrinsic value. Once you have determined its intrinsic value you should only ever pay less, much less ideally.
- Diversify – avoid putting all your eggs in one basket to ensure you have sufficient winners elsewhere should your assessments not come up to scratch.
- Patience – once you have identified a bargain, all you need to do is wait for the market to catch up with your assessment.