A Super Simple Guide to Value Investing
These are the principle I follow for every investment I make
The principles below are basic, easy to remember and crucial if you want the stock market to be the best place to increase your wealth in a safe and sound way, and not a casino!
The Mantra of Value Investing
Look at what the company does and how it performs in their operations. The company’s stock performance is secondary and only represents today’s price.
If you want to invest in a good company, the goal is to estimate its future profits and find companies with a low price in comparison to these estimated profits.
Do not try to guess a company’s future stock price based on your view of the market or love towards a brand!
Its easy to dream about your favorite brand taking over the world or how macro factors like global warming will make a company’s product essential to everyone, but without data from its balance sheet indicating this, those are just dreams.
A great example is the introduction of the car in the US around a 100 years ago. At the time, it was easy to see that cars would become a hit, but out of the 100s of carmakers, only a dozen survived…
Don’t get caught up in crazy trends! In the short run, the stock market can be extremely irrational. People jump in and out of hot stocks and companies gets pumped and dumped like chips in a casino.
However, in the long run (around 5-10 years), the stock market have always followed the actual value of their companies:
What to buy?
So, what stocks should you buy?
These are the core principles you should follow before investing in any stock:
Buy something you understand - Often, things you don’t understand look more enticing. A new cure fore cancer? A nuclear power plant without radioactive waste? Ideas like this gets floated by companies all the time, and if you don’t know their industries, you have no way to verify their claims. Don’t fall for this trap!
Buy companies that makes money today - No matter the hype, a company that doesn’t make money haven’t proven their viability. Sure, some of the high-growth money losing companies end up being worth billions, but for every one of those, there are a hundred that go bankrupt!
Look for mid-sized companies - Too big companies are usually already fairly priced and don’t have much room to grow. Too small and they risk getting wiped out in a recession even if they have a solid business. Mid-cap is a good place to start in most markets.
Buy companies that can control their destiny - If the company is completely dependent on market prices, such as natural resource extractors, you might as well buy a natural resource certificate and remove corporate risks.
Diversify - Always diversify your stock portfolio to different industries and never invest too heavily in one company. Even if you have found the most undervalued company in history, things can go wrong! Unforeseen things happen all the time and can decimate amazing companies. Just think of Covid 19! Before the virus, there were a plethora of hotel and leisure stocks with strong balance sheets and huge future upsides, but because of something completely out of their control, many of them have gone bankrupt…
Conclusion
Again, this guide is extremely basic, but if you follow the principles above you will be able to use the stock market as a viable second source of income.
You will still have to search for the next Google or Netflix yourself, but these principles will help you separate the wheat from the chaff.
Now go out there and sow your seeds!