In my last article on A serious problem with the steel related industries in Bursa, there were a few comments as below.

Posted by qqq3333

Value investing? what is that?

Posted by qqq3333

losing money on low PE? that is what kcchong the value investor is a specialist.

I wonder how many retail investors in the stock market know what value investing is. My hunch is that when asked, the reply, if any, would be buying cheap stocks – those that are trading at low price to earnings, just like what the above fellow said. I am not surprised that he even thinks that value investing as buying low-priced stocks selling for a few cents.

If this kind of thinking comes out from an accountant (He said he was an accounting, not I say), what do you expect what the public think about what value investing is?

But what he said is far from truth in the perspective of a true value investor.

Charlie Munger, who has influenced Buffet in purchase of Coca Cola and other seemingly high price acquisitions mentioned it out clearly.

“All intelligent investing is value investing- acquiring more that you are paying for. You must value the business in order to value the stock.”

Munger explained further,

“You’re looking for a mispriced gamble. That’s what investing is. And you have to know enough to know whether the gamble is mispriced. That’s value investing.”

So, value investing is intelligent investing. Value investing is about looking for a mispriced gamble, getting more than you are paying for. It is not just about buying cheap stocks. You must know about the business and hence the value the business. It is still a gamble, not a riskless endeavour, but by knowing the business and its value, the probability of winning is higher.

What did Buffett say about value investing?

In his 1992 letter to Berkshire Hathaway shareholders, Warren Buffett wrote…

“We think the very term ‘value investing’ is redundant. What is ‘investing’ if it is not the act of seeking value at least sufficient to justify the amount paid? Consciously paying more for a stock than its calculated value – in the hope that it can soon be sold for a still-higher price – should be labelled speculation (which is neither illegal, immoral nor – in our view – financially fattening).”

“Whether appropriate or not, the term ‘value investing’ is widely used. Typically, it connotes the purchase of stocks having attributes such as a low ratio of price to book value, a low price-earnings ratio, or a high dividend yield. Unfortunately, such characteristics, even if they appear in combination, are far from determinative as to whether an investor is indeed buying something for what it is worth and is therefore truly operating on the principle of obtaining value in his investments.”

“Correspondingly, opposite characteristics – a high ratio of price to book value, a high price-earnings ratio, and a low dividend yield – are in no way inconsistent with a ‘value’ purchase.”

What Buffett means is an investment should logically be done by acquiring something which has a value more than the price paid. Whereas buying a stock at high price and hope for its price to rise further is not investing at all but speculating.

Buffett also emphasizes that buying a stock at low P/E, low P/B, high dividend yield, or a combination of those metrics may or may not truly getting the value for the price paid.

Many great investors focus on buying stocks of quality companies with high growth potential. That is also a form of value investing as the future growth in earnings and cash flows are part of their present values. Warren Buffet used to say,

“Growth and value investing are joined at the hip”

Joel Greenblatt, a billionaire fund manager, and university professor of the Magic Formula fame, and the author of the book, “The little book that beats the market” mentioned this below,

“The secret to investing is to figure out the value of something – and then pay a lot less.”

So, value investing is the processes of value the something you buy and pay a price a lot less than the estimated value to that thing. Qualitatively, the process of value investing can be looking into and evaluating value, quality, or growth stock. However, this is what another famous hedge fund manager says,

“A high-quality asset can constitute a good or bad buy, and a low-quality asset can constitute a good or bad buy. The tendency to mistake objective merit for investment opportunity, and the failure to distinguish between good assets and good buys, get most investors in trouble.”

It implies even if you buy a quality and high growth asset, but if you overpay for it, you can lose a lot of money too, and vice versa.

That is what value investing is all about; that you must carry out the assessment of the value of something and pay a lot less than it. In another words, invest with a high margin of safety.

Do value investors lose money in the stock market now?

Well, if a value investor looks at his portfolio from the beginning of this year, most likely there is a decrease of the value. If not, he will be very lucky. But does it mean he has lost money as this guy said?

Posted by qqq3333 > 8 hours ago | Report Abuse

ks......... there is definitely enough shares for people to lose money. ...and that includes enough shares for kc chong to lose money

Not for me. I have been a value investor from about 15 years ago, not very long. There have been a few years when the value of my portfolio declined, just like this year, in double-digits. However, value investors buy good companies at good price, and they don’t sell a good company because of it has gone down in price, just because others get panic do.

Over the last 13 years during which I have proper record, the compounded annual return is still managed to be in double-digits. No, I don’t lose money as a value investor. I wish I had become a value investor much earlier than 15 years ago. Anyway, it is not too late than never.

But I do know speculators and gamblers in the stock market, 93% lost money, many of them all their money, just like the one being commented below by someone who knows him well.

Posted by ks55 > 8 hours ago | Report Abuse

qqq, What has happened to your 100k capital? All gone by now?

Don’t get too disheartened. My portfolio declined many times more than your 100k capital, in just the last 7 months.

Speculators and gamblers buy shares at high price because they are hot and hope to sell to the next greater fool in days, and sometimes even on the same day. So, in a continuous downtrend market, how not to lose money?

That is the big difference between a true value investor and a speculator or gambler in the stock market.