We've discussed elsewhere the paradox that while value investing is the tried and trusted method of some of the world’s most famous, wealthy and influential stock buyers, for some reason it is still widely overlooked by the majority of institutional investors. We argue that this short- sightedness of the professionals works to the advantage of the motivated and determined individual investor. But where to begin? Value Investors worldwide disagree on many aspects of investing, but rarely on some fundamental principles!
Key Principle 1: Price is not value
The first key lesson for the would-be Value Investor is that the worth of a business is independent of the market price. A stock quote from day to day is only how much just the few shareholders who bother to trade that day decide their investment is worth. It is categorically not the worth of the entire company. This is the reason share prices so often spike when being bid for by an acquirer, who generally has to pay something closer to fair value. Investors should understand that the share price is like the tip of an iceberg – you can see it, but you’ve no idea how big or small the iceberg is below the surface unless you put on your dive suit. As Ben Graham has observed: “price is what you pay, value is what you get”, meaning that big swings in the market don’t necessarily mean big swings in value. When you buy a stock, you are buying ownership of a business with real assets. Should that really change just because the market is moody or plagued by worries about liquidity?
Key Principle 2: Mr Market is a crazy guy
In Graham’s “The Intelligent Investor”, a book which is required reading, the author conjured his now infamous parable of Mr Market. He asks the investor to imagine that he owns a small share of a business where one of the partners is a man named Mr Market. He’s a very accommodating man who tells you every day what he thinks your shares are worth while simultaneously offering to buy you out or sell you more shares on that basis. But Mr Market is a manic depressive whose quotes often bear no relation…
