Learn to invest with Buffett

Chapter 23

Chapter 4 Value Investing: Buffett's Timeless Investment Rules
Chapter 4 Section 1 Can value investing continue to beat the market

As an investor, in investing, you pay price and get value.You don't need to take into account the price cycles of those individual stocks and the volatility of the entire market.The market cycle is by no means an important factor affecting investors' choice of stocks, but when the stock price is at a high level, it is more difficult for you to find those stocks that are undervalued by the market, because most of the stock prices are on the high side at this time; They will have more choices, because most companies are undervalued at this time, and you have more choices.
--Warren Buffett
Value investment is relative to risk investment. It is based on price fluctuations around the value axis, resulting in investment behavior of buying low and selling high, and pursuing long-term value expectations and value realization. Sharing the benefits of long-term appreciation of assets is not short-term speculation.Value investment in a traditional or narrow sense mainly refers to direct industrial investment in potential industries and popular industries. For example, in the early 80s, the commodity economy became active, and direct investment in consumer goods processing plants and trade development became hot spots; in the early 90s, housing system reform in the Mainland , many direct investment developments, driving the prosperity of the real estate industry; entering 2000, the rapid development of the global economy formed an energy bottleneck, and oil, coal, electric power and other energy industries became investment hotspots and so on.In a broad sense, value investing includes not only direct industrial investment, but also indirect investment in related assets, that is, investment in listed assets or listed companies in related industries.Due to the long-term disregard and misunderstanding of "value investment", investment in listed assets or stock market investment is often understood as high-risk investment.The cornerstone and connotation of a mature stock market lies in value assets.

Value investing is not only a correct investment philosophy, but also a correct investment method and technique.The fundamental reason why people turn pale when they talk about stocks and regard the stock market as a high-risk place is that the legal system is not perfect, the efficiency of management and monitoring is ineffective, the corporate governance is weak, and the economic cycle and market fluctuations have an impact on asset value and investor psychology. influences.The focus of value investing is the value nuggets of the securities market in a broad sense.

Buffett said: "The investment performance of every value investment comes from the difference between the company's stock market price and its intrinsic value." Value investment continues to beat the market with high returns and low risks.

Since Graham published "Securities Analysis" in 1934 and proposed value investing, the securities market has grown and grown over the past 70 years, and great changes have taken place. So, has value investing been effective during these 70 years?The answer is: effective, and very effective. It can even be said that value investing is the only investment strategy that can consistently beat the market.

The practice of value investing has also proved that value investing based on the margin of safety can achieve investment performance that exceeds the market average, and this excess return does not come from high risks. On the contrary, the relative risk of value investment strategies is smaller.

According to Buffett's statement that value investment has higher returns and lower risks, according to the ratio analysis of some financial indicators and stock prices (price to earnings ratio, price to book value ratio, price to cash flow ratio, etc.), it shows that investing in low price-earnings ratios , Low stock price dividend income ratio, low stock price cash flow ratio stocks, can obtain excess investment profits.Although these indicators cannot directly indicate the size of the margin of safety, they can indirectly prove that the stocks of companies with a lower ratio may be undervalued relative to the stocks of companies with a higher ratio, so relatively speaking, they have a larger margin of safety.Therefore, this provides more basis for ordinary investors to adopt value investment strategies.

Value investors take advantage of the deviation between price and value to buy target stocks at low prices and sell the stocks they bought at low prices at higher prices.So, why does the value investing principle work?In other words, why do prices and values ​​fluctuate like this in the stock market?In the stock market, why does the price often deviate from the value, and after a long time after the price deviates from the value, the price will return to the value?This is the most important question that all value investors must think about.Because understanding the fluctuation law of the market is of great significance for investors to beat the market.

In fact, the key to value investing's continuous victory over the market lies in the fluctuation of the stock market and the rational use of the law of value.Buffett recalls asking his boss, Graham, while working for Graham-Newman: How can an investor be sure that when a stock is undervalued by the market, it will eventually appreciate in value?Graham simply shrugged and replied, "That's what the market always does in the end. In the short run, the market is a voting machine; but in the long run, it's a weighing machine."

In today's society, value investing has attracted more and more people's attention, but not many people really do it.Because although the concept of value investment is not difficult to understand, it is difficult for people to practice it in this way, because it contradicts some inertial effects in human nature.Investors are accustomed to "lemming-style" actions, and it is not easy to let them break away from the original group.As Buffett pointed out: "In my more than 30 years of personal experience in the investment field, I have not found a trend to apply the principles of value investing. It seems that there is always some bad element in human nature. It likes to make simple things complication."

For investors, the important thing is not to understand other people's investment philosophy, but how to apply it in practice.

Investment motto:

After an investor finds a company with a sustainable competitive advantage, buying its stock does not guarantee him a profit.He must first evaluate the company's value, determine the value of the company's stock he is going to buy, and then compare it with the stock market price.The most basic strategy of value investing is to take advantage of the divergence between price and value in the stock market, buy stocks at a discount price lower than the intrinsic value of the stock, and sell it at a price equal to or higher than the value after the stock price rises, so as to obtain excess profit.

(End of this chapter)