Value investing is Warren Buffet’s secret to being rich. However, it is not a secret. He tells the world his investing methods. Anyone can do it. It is a simple concept with complicated variables.
The big principle is to find a company that can be invested in for a lower cost than the company is worth. Value investing generally uses book value for determining company value. This is a very conservative valuation method, as it does not take into account future earnings.
Because of the conservative valuation method, you are essentially buying the company for less than it is worth. Even if the company goes out of business, you still have an ownership in assets that are worth more than you paid.
How can you identify these opportunities today? Look at a company’s financial statements and find net book value and assets and liabilities. If the market capitalization (total value of all shares of stock) is lower than assets less liabilities, you found a bargain according to the value investing method.
While Buffett is the most famous value investor, he did not come up with the idea, he just adapted it to his own investing style. Benjamin Grahm is often credited with creating value investing. He worked with co-professor David Dodd to create this “cautious approach to investing”. Grahm was Buffett’s professor at Columbia.
Since the 1970s, Warren Buffett and his partner Charlie Munger have been considered the top value investors in the world. Proof is in stock. Just look at Berkshire Hathaway over the last four decades, value investing works.
Of course, you need to do more research than just whether or not the market cap is lower than assets less liabilities. Just ask Benjamin Graham. He himself was a notoriously bad investor, even if his principles can help you find value.
Very true. I use a combination of valuation methods when picking a stock. I like discouted cash flows, multiples valuation within the industry, and concepts like value investing.