This is Value Investor Academy
Value investing is often associated with buying stocks with low price ratios such as a low PE ratio and a low price to book value. While many ‘value’ stocks have low price ratios they are not requirements for value investing.
Simply put value Investing is the process of buying a stock (or asset) for a price that is less than its value.
Price Does Not Equal Value
The first thing I want you to know is that price does not equal value.
As Warren Buffett puts it “Price is what you pay, but value is what you get”.
Price is what someone is willing to pay for something.
Value is what it’s actually worth.
Trading versus Investing
When you are investing in something you do so because you believe that it will increase in value over time. Other investors will notice this increase in value and be willing to pay more for it.
Example: I invest in a small business. When I first invest in the business it generates $1000 a week in profit. After one year the business generates $1500 a week in profit. Because the business now generates more in profit than it did a year ago it has more value. Other investors will notice that the business has increased in value and be willing to pay a higher price for it.
When you are trading something your only intention is to sell it to someone else for a higher price. The thing you are selling may not increase in value between the time that you buy and sell it.
Example: I go online and see a car is selling for $10,000. Because I am a great negotiator I manage to buy the car for $8,000. Two months later I find a buyer for the car for $12,000. I would make a $4,000 profit but during this time the value of the car remained the same, Only the price changed.
How Value Investing Works
Warren finds a company called Boston Bricks. After looking at the numbers he determines that a share of Boston Bricks has a value of around $50 a share. He goes on to his broker’s website and sees that Boston Bricks is selling for $30 a share. He buys a share of Boston Bricks because he thinks it is undervalued. Over the next year, the price per share of Boston Bricks returns to its value per share of $50. Warren then sells his share for a $20 profit.
Value Investing is all about determining the value for something and paying less than that.
Famous Value Investors
Buffett learnt much of what he knows about value investing from his professor Benjamin Graham. Graham is often called “the father of value investing”. He has two legendary books on value investing “The Intelligent Investor” and “Security Analysis”. These books are quite complex and not beginner-friendly.
At Value Investor Academy our goal is to present to you the knowledge of value investors such as Buffett and Graham so that the average-joe can use and apply it.
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