Investing has always been a challenging problem that many people want to solve but never can. Simply put, anyone can invest, but successful investing is not easy. Many of the well-known investment gurus are unanimously value investors, such as Buffett, Peter Lynch, and Charlie Munger. To become like them, one must first understand what value investing is and how they achieved their success.
The Four Principles of Value Investing
So, what is value investing? Value investing was first formed by Benjamin Graham about eighty to ninety years ago. Today, the leading figure and the most well-known representative in value investing is Mr. Buffett. There are only four principles of value investing. Remember, just four. The first three are concepts from Buffett’s teacher, Benjamin Graham, and the last one is Buffett’s unique contribution.
First, stocks are not just securities that can be bought and sold,
but actually represent certificates of ownership in a company, giving you partial ownership. This is the first crucial concept. Investing in stocks is actually investing in a company. As the company grows with the GDP and continues to prosper in a market economy, value is continuously created. In this process of creating value, as partial owners, the value we hold will grow along with the company's value. If we invest as shareholders and support the company, we will earn our due benefits as the company’s value grows. This path is sustainable. What is a righteous path, and what is a crooked path? The righteous path is receiving what you deserve. Therefore, such an investment is a righteous and straight path. However, very few people understand stocks in this way.
Second, understand what the market is.
On one hand, a stock is partial ownership; on the other, it is indeed a security that can be exchanged and traded at any time. There are always people bidding in this market. How should we understand this phenomenon? In the eyes of value investors, the market exists solely to serve you. It provides opportunities to purchase ownership and gives you a chance to cash in when you need money many years later. The market exists to serve you. It never tells you the real value; it only tells you the price.
Third, the essence of investing is predicting the future,
and the results of predictions can never be 100% accurate, just ranging from zero to nearly one hundred. When we make a judgment, we must allow a large margin of safety because you cannot distinguish with certainty. No matter how confident you are, always remember the margin of safety; your purchase price must be significantly lower than the company’s intrinsic value. This concept is the third most important idea in value investing. For instance, even if you are 80% or 90% certain, because reaching 100% is impossible, if the 10% or 20% possibility occurs, it would negatively impact your intrinsic value. But if you have enough margin of safety, you won’t lose much. Always require a huge margin of safety when investing; this is a skill.
Fourth, Buffett added a concept through his fifty years of practice:
Investors can establish their own circle of competence through long-term, persistent efforts,
gaining a deeper understanding of certain companies and industries than almost anyone else, and making more accurate long-term forecasts for these companies. In this circle is your unique capability. The most important aspect of the circle of competence is its boundaries. Without boundaries, the ability is not real. If you have a viewpoint, you must be able to specify the conditions under which it is not valid; only then is it a substantial view. If you just tell me this is the conclusion, it must be wrong and cannot withstand scrutiny. The concept of the circle of competence is crucial because of the “market.” What is the purpose of the market? For market participants, the purpose is to expose human weaknesses. Any point you do not fully understand or psychological and physiological weaknesses will be exposed in certain market conditions. Those who have been involved in the market will understand what I mean.
Value Investing is a Righteous Path and Great Road
These four aspects together form the entire meaning and fundamental philosophy of value investing. The philosophy of value investing is not only simple and clear to explain, but also a great and righteous path. The righteous path is sustainable. What is sustainable? Sustainable things have a common feature: what you gain is what everyone else sees you deserve. If you publicly disclose your method of making money and everyone thinks you are a fraud, then that method is unsustainable. If you disclose your method bit by bit without reservation, and everyone thinks it is valid and admirable, then it is sustainable. This is the great and righteous path of value investing because it tells you that investing in stocks is essentially investing in ownership of a company. Investing first helps the company’s market value align more closely with its intrinsic value, which is beneficial to the company. Supporting the company also increases your intrinsic value, ultimately benefiting the economy, the company, and yourself. The return you receive is deserved, and others perceive it as deserved, making it a great path.
Value Investing Sounds Easy, but It's Hard to Implement
This is the entire philosophy of value investing. It sounds simple and logical. But what is the reality? In the actual investment process, such investors are few in the market. Almost all investment-related theories have a lot of followers, but true value investors are very scarce. As a result, most people do not understand what you are doing, and investing becomes a wealth killer. But the great path of investing is deserted, while the side paths are bustling. Why do people take shortcuts? Because the great path is slow. We know that a company's success requires many people, a long time, persistent effort, and some luck. This process is challenging. Another difficulty is predicting the future. Investing requires forecasting the future and truly understanding a company or industry to predict its situation 5 or 10 years later. There are too many uncertainties, and most industries and companies are hard to predict over such a long time. But it is not entirely impossible. With genuine effort, you can clearly see the future of some companies or industries for the next ten years. This requires years of relentless effort and hard study to reach such levels. When you can make such judgments, you start building your circle of competence. It starts small and takes a long time to establish. This is why value investing is a long journey. Although it undoubtedly leads to success, most people are unwilling to take it since it requires significant time investment and still yields limited understanding. Those who overestimate their competence will inevitably be ruined by market conditions. The market is designed to expose your weaknesses. The fundamental requirement for this industry is to be fully, 100% honest in knowledge. Never deceive yourself because self-deception is the easiest, especially in this industry. Telling lies repeatedly, you might start believing them, but such a person can never be an excellent investor and will inevitably be destroyed in certain market conditions.
The Great Path is for the Persistent
The path of value investing seems like a great road, but it is very far from success. This market always gives the illusion of short-term profits, leading people to focus their time, energy, and intellect on short-term market predictions. This is why people take shortcuts instead of the great path. In reality, almost all shortcuts turn into side paths. Long-term, at least in American trading records, almost no short-term trading strategies have consistently succeeded. Among those with excellent long-term investment records, almost everyone is a value investor. Short-term investment performance often depends on market luck unrelated to personal ability. In the short term, there will always be winners and losers, but long-term winners are rare. This is a core issue in judging value investing: luck or competence. The market can provide an average cumulative return of 14% over 15 years, making it unnecessary to be a genius for good performance; but returns can be negative over consecutive years, requiring excellent performance under these conditions. Although this great path undoubtedly leads to success and is free of traffic, few take it, and those who do earn the success they deserve in others' eyes.
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