You have heard the term value investing a couple of times, but what does it entail exactly? And does this strategy even work? These and more questions are answered in this introductory article into the mystical realm of value investing.
“Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down.” ~ Warren Buffett in Letter to Berkshire Shareholders (2008)
The above statement made by the most successful investor of all time, Warren Buffett, highlights the essence of value investing: buying great companies at a discount price. This might sound easy, but history has shown that the large majority of both private investors and professional fund managers are unable to beat the market. However, value investing allows you to beat the market consistently, as Warren Buffett and other value investors like Mohnish Pabrai and Joel Greenblatt have shown over the years.
Benjamin Graham, a Columbia Business School professor and mentor of Warren Buffett, is the so called “father of value investing”. He wrote the best selling books Security Analysis and The Intelligent Investor in which he explains the value investing framework in detail. Graham pointed out that stock prices often divert significantly from the actual fundamental value of the underlying business. He believed that buying stocks of solid businesses when they are under-priced with respect to their fundamental value allows someone to make a great return on investment at a lower risk. This rational analysis method was quite different from the speculative “greater fool” mentality that seemed to dominate Wall Street.
Graham taught all of his value investment principles to his student Warren Buffett, who then used this knowledge to amass a fortune of no less than $63 billion, making him the 3rd richest person in the world. If you had invested $10.000 in Buffett’s investment vehicle Berkshire Hathaway in 1965, you would today be the proud owner of more than 85 million dollar. In comparison, the same amount invested in the S&P 500 would “only” be worth halve a million today. This enormous difference in profit is the result of consistent market beating returns earned by applying sound value investment principles in combination with the awesome power of compounded interest, which Einstein referred to as being “the eighth wonder of the world”.
The following video explains why you should invest in the first place, why stocks are the best place to put your money, the right way to look at stocks, what value investing is and why all the greatest investors in the world apply this highly effective strategy. Check it out!
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