Value Investing

I've recently completed a USD$3,000 online course on value investing offered by the Columbia Business School, the alma mater of Warren Buffet. In value investing of listed company shares, the frame of mind is that of a business owner. You only buy a company or shares of a company if you believe the net-earnings of a company over time will exceed your initial capital invested. Anything else is gambling or speculating! And any good business will not be selling cheap except in severe mis-pricing that can occur during a market panic resulting in a market crash. Therefore, being a value investor also means having patience for returns to materialise over the long term.

In general, I have benefitted from the course, which provided an approach as well as methods to quantify the value of a company. This assessed value can then be measured against the listed price of the company stock. Naturally, you would want to purchase a company stock only when the assessed value is above the share price, the bigger the value gap, the higher the margin of safety! Some frameworks to qualify the value of a company mainly involves the analysis of a company operating within its industry and how does it measure up against fellow competitors in terms of market share and competitive advantages.

Here are my top 3 key insights:

1. First and foremost, the main limitation of any valuation approach would be imperfect information, after all, a retail investor like myself is an outsider looking in. An annual report is useful but often does not provide sufficient resolution and many assumptions would have to be made, for instance, on the company's track record on returns of investment. As such, for industry and companies that are difficult to understand, it is best to avoid or a more conservative value estimation with higher margin of safety would be required.

2. Secondly, the assessed value of a company is just an estimation and is a variable of many factors and assumptions. Chief of these is an investor's expected returns as well as a company's expected returns. The prudent approach would be a conservative one, and if that means doing nothing and waiting patiently, so be it! As such, investing is a highly personal affair as people have different risk profile and analytical capability. More importantly, is having the temperature to execute on rationalised decisions. It is easy to throw away logic and give in to Fear Of Missing Out (FOMO) in this era of highly speculative markets, such as in crypto "currencies"

3. Thirdly, the amount of research required is also a variable, one can literally spend months or years researching on a company. No surprises given that financial analyst are typically full time time jobs. As a retail investor with imperfect information and limited time, investing in individual companies rather than buying broad-base ETFs requires an approach that is focused, highly prudent and long term looking. I find that filtering companies with quantitative valuation that looks squarely at sustainable net earnings vis-a-vis enterprise value help the most. Only when a company's numbers look good that I will then perform further qualitative analysis.

Finally, I enjoy picking stocks because it allows me to learn about businesses that I am interested in and keeps me aware of business trends. Whether it will be a profitable venture only time will tell! To end off the post, an interesting resource to benchmark against the world's best super investors is dataroma.com.