The importance of value investing

SHARE   |   Tuesday, 16 December 2014   |   By Nelson Letshwene

I have met a lot of people this year who are interested in investing in shares on the stock market. Many were eager to learn even though they find the financial lingo intimidating and strange. I have said to many of them that one of the ways to learn a language is to hang around the tribe to pick up their vocabulary and associate words with meaning. This means listening to and reading business news even though they sound like a foreign language. Another way is of course to go to the language laboratory and take an intensive course in the language.

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For those who would like to take stock market investing to the next level I have suggested  a number of books to read. You can find that list on this paper's website or on the blog whose address is at the end of this article. Just like learning a new language, there is a lot of vocabulary to learn, but you always start with the simple things first. Opening a trading account with a broker is like knocking at the door and being let in.

One of the most important things for a stock market investor is knowing which companies to invest in. This is not a problem only for people coming to the stock market for the first time, but it's an issue even for old investors because these goal posts keep shifting a lot of the times. Those who have learnt to sturdy the ship a little bit are those who are called value investors. A value investor focuses on understanding the company that they invest in. Let's start with blue chip companies.

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A blue chip company is by definition, a nationally recognised company that sells nationally or internationally recognised and accepted goods or services. This is the kind of company that may be said to be "too big to fall". This of course does not mean it will never fall, it just means the probability of a fall  are minimal. Value investors look at these kinds of businesses. When they buy the share of this company, they see themselves as buying into the business. They are putting their money into a company whose business they understand. They don't buy the share, they buy the company. This allows them to be concerned about this business and to watch every important move that his company makes.

They look into the management of this company. They want to know who the CEO is and who his or her top management team is. About the CEO, Warren Buffett says "look for three qualities: integrity, intelligence, and energy. And if they don't have the first, the other two will kill you."

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Andrew Beattie writes, "You can get a sense of management's honesty through reading several years' worth of financials. How well did they deliver on past promises? If they failed, did they take responsibility, or gloss it over?"

Buffett also says the company should be simple enough and strong enough that even a bad manager can't destroy it. It must be foolproof.  The structures must be strong enough that it can be run by an idiot, because one day, an idiot will run it.

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If you have done your homework about the company and you are comfortable with your choice, the movement of the share price won't concern you that much, especially if it's not due to problems in the business. You will be able to separate share trader emotions from business indicators.

We will hopefully spend more time in the next year on many such topics of investments.

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To your success. Follow the blog on www.thegoldenruleblog.wordpress.com or follow me on twitter @101silverline 



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