a hitchhiker’s guide to value investing

let’s tell you a story. there was once a man in the US. he was told, reliably, that if you tortured iron enough times, you could turn it into gold. there were alchemists everywhere around him. he had seen his neighbour convert small pieces of iron into gold. he knew he could do it as well. he spent years trying to perfect his techniques. he got no gold. alchemy by then was ruled out as being real. so how did his neighbour do it? chances are, either the neighbour conned him or he had gold in the first place and didn’t know it.

alchemy isn’t dead. it is still alive. there are several famous alchemists in our world. they don’t live in a lab, they’re on the stock market. Warren Buffett, Charlie Munger, and Peter Lynch are all alchemists. they see gold where others see lumps of iron. also, they aren’t called alchemists, they’re called value investors.

value investing is all the buzz. 

origin story

it was all started by Benjamin Graham in the 1920s. he had just lost all his money, about $500,000, in a stock market crash. and that’s when he came up with an idea of finding and investing in companies that have been ignored or under appreciated. he, at the time, looked and analysed companies, whose assets were worth more than the price.

what does it mean?

Graham wrote an entire book about it. and things have evolved since then. but in a nutshell, here’s how it goes. 

1. identify stocks that are trading at a price lower than its revenue and earnings. 
2. invest in them before the broader market starts to recognise its potential.
3. wait as the stock appreciates.
4. cash out at its peak.

why is it popular?

it is the foundation of the popular mantra of buy low, sell high. but this is not the reason value investing is popular. it is popular because of the nuance. a good value investor locks in a security blanket in her strategy.

because the entire thesis is based on the fact that the stock is undervalued, the larger the difference between the current price of an undervalued stock and its fair value, the larger the price appreciation and bigger the margin of safety in the stock. 

not a get rich quick scheme

value investing requires patience. lots of patience.sSometimes stocks take years to mature and reach their ideal market price. there will be dips caused by the economic headwinds. but it is a strategy based on the long-term compounding of wealth and conviction on the stocks one picks. if the pick is right, the company will survive these headwinds and emerge as a clear winner.

next time you make a decision, ask yourself, do you believe in this company? is it undervalued? if the answers are yes, get started.