Young investors always ask, “how do you start value investing? Is value investing outdated today? Value investing is not dead; rather, all investment is value investing. We all have heard the name of Warren Buffet, the king of investing world, who loves value investing. The problem is young investors don’t have enough patience to be second a Warren Buffet. Now you may ask me another question, “What is the best way of understanding how investments work?”
Don’t worry; I will write details about value investing in this article. I hope you are not going to waste your valuable time. Let’s start with the following:
- Make diversified portfolio investments & focus on a single investment. You have to understand which investment can add value to others.
- Value investing is still alive; only a few investors have enough skill to implement it.
- Patient & deep understanding of market trends are the keys to value investing. You have to understand that value investing is a long-term goal.
Is value investing outdated today?
No. Value Investing isn’t outdated today, but few practitioners have enough skill to make it work.
For example, most investors at present need more patience. They want quick profit but invest less time & effort, which ultimately leads to failure. For this reason, they thought value investing was obsolete today.
Now, why does most investor think value investing is a scam? Let’s understand it deeply:
Is value investing a scam?
No, value investing is not a scam. People called it a scam because most don’t have enough skills to understand & implement value investing.
For example, Warren Buffet is a value investor. If value investing is a scam, then how can Warren Buffet be so successful in the investment world? You have to understand that just luck can’t make anyone Warren Buffet.
Let’s take a financial example. Harry invested $100 to buy some cars at a discounted price & expected a future cash flow of $100 XCXN. So, the mathematical equation will be 0<C< 1 where C approaches 0, the risk factor approaches 0 & “N” denote time.
If C=0.5, N=5 years
$100X0.5X5=$250, which is bigger than the discounted value of $100
If C=0.99, N=5years
$100X0.99X5=$495, which is bigger than the discounted value of $100
So, value investing is not a scam but a matter of proper understanding.
In this phase, you may say; Ok, I got it. Now tell me, how do I start value investing as a beginner? Let’s understand how you start value investing:
How do you start value investing?
You need to understand why you want to invest. Build a solid understanding of your investment portfolio. Make a diversified portfolio pool & emphasize a single investment. Be patient & aim for steady returns.
Let’s understand it by the following example:
Harry is a local investor in Mississippi. He invested a significant portion of money in the Hatchback car & wants to increase the 30% selling price. Harry expenses 14% of the selling price for promotional purposes. Below is the statement:
|Costing Heads||Amount (%)|
Say, the new selling price is $32,500 (25000 X 30%), Will Harry succeed in selling for $32500? Harry wants to gain 8% profit by selling the car. The promotional expense will create awareness among people that doesn’t mean they will expense $32,500 for the vehicle. There are many good brands in the market & that have long-term reputations. Would Harry be able to beat these brands? Certainly No.
Let’s consider another scenario:
This time Harry spends 50% on promotion & another 50% on CSR activities.
|Costing Heads||Amount (%)|
Harry donates 7% of the money for schools, hospitals, roads, and bridges, & provides free meals for homeless people. Mississippi has the highest poverty rate (27.9%) in America. Are these types of activities creating a positive image for Harry? Definitely yes. Investment needs positive acceptance from mass people. This acceptance ultimately decides the value of a project. Let’s estimate the CSR cost of Harry.
|CSR statement of Harry|
|Costing Heads||Sales (%)|
Is not 7% on CSR; an extra expense? In the figure, yes, but in investment, no. How? Ordinary people always ask the following questions:
What has your company done for local people?
How much do you care about us?
Have you ever done any good thing for local infrastructure?
Does Harry answer the above questions? Yes. Now you may think about how CSR increases numerical value. CSR creates a strong brand image, recognition, & reputation, which adds value to Harry’s investment. It will augment customer loyalty & sales volumes. Harry can also save from operating expenses, employee turnover, & legal burdens. So, Harry will get goodwill which maximizes the selling price.
Raw material purchase
Add: CSR expense
Add: Advertising expense
Add: Carriage cost
|Gross profit |
Deduct: Tax & vat
Deduct: Operating cost
Net Profit=Gross Profit-Tax
CSR activities help Harry gain an 8% margin and create a favorable market of acceptability. CSR also releases Harry from tax, vat & legal burdens.
Here, CSR works as a spider web in investment. Let’s understand What is spider web investment?
What is Spider web investment strategy?
If one particular investment backs multi-investment heads in a crisis is called spider web investment. This typical investment could be a product or project.
For example, Joe invested in gold, real estate & stocks. In this situation, if the stock price is down, then gold can back by its high value, or, say, gold & stock are down, then the real estate can support them by providing a good margin.
Take the example of Harry to understand it deeply. He invested only in the Hatchback car, but due to his CSR activities, he will get positive acceptance from mass people. In other words, CSR indirectly creates goodwill that helps to add value not only to Hatchback but also to other car products.
Due to this goodwill, the investment success rate will increase for Harry.
If you read the above article patiently, you will ask me do all investments are value investing. The answer is yes. So, let’s understand it:
Why all successful investment is value investing?
We invest for wealth maximization. For this reason, all successful investment is value investing.
Say, you have $10 idle money. Would you invest in anything that gave you less than $10 in the future? Certainly not. Therefore, we only invest in those things that will provide the best return in the future.
Imagine you have invested $10 to buy 20 chocolates. Per day you sold ten chocolates.
Here, the cost for 1 chocolate=$0.50
The selling price of 1 chocolate=$1
In 2 days, you sold 20 chocolates.
So, profit=selling price of 20 chocolate – cost of 20 chocolate
Therefore, after two days, your estimated profit will be $10.
Now you have a total of $20 (previous $10 & profit $10) to invest.
So, profit=selling price of 40 chocolate – cost of 40 chocolate
Therefore, after four days, your estimated profit will be $20 & continuously adding value to your invested money.
How does CSR work as a margin of safety?
CSR makes a difference between the current value & discount value of a particular asset by adding value after a definite period. In this way, CSR adds value as a margin of safety.
For example, Harry added value to other car items by expensing money on CSR activities. These CSR activities will provide a margin of safety if the market price is lower than the anticipated value.
How does CSR mitigate the risk of a diversified portfolio?
CSR (corporate social responsibility) reduces risk by adding monetary value to other investment items.
Such as, Harry creates a diversified portfolio by issuing Sedans, Coupe, SUVs, Van, & Hatchback cars. He makes a single investment to promote Hatchback, but CSR also adds value to the other four vehicles. This way, CSR reduces monetary risk by adding extra worth to other investment folios.
Let’s consider a financial condition:
|Portfolio pool||Manufacturing cost||Expected value||Market value||Monetary gain|
Harry loses $975 in Hatchback but adds value to other cars. His overall margin is $1,425. See how CSR helps Harry balance potential losses in one investment with gains in another.
Value investing is a time-tested strategy for the long term. It could be challenging during market fluctuation if you don’t take the right risk management strategy. Before starting value investing, you need to answer four questions:
- What do you want to buy? How much should you buy?
- How do you add value to your asset?
- When should you buy or sell?
But it would be best to have a deep understanding before investing in any asset. For this, you have to develop three skills:
1. How to analyze the asset you will invest in?
2. How to value this asset?
3. How to mitigate investment risk?
Frequently Asked Questions (FAQ):
What is value investing?
Value investing is buying some assets that are undervalued today & holding onto them until the market recognizes their actual value.
Say you have purchased some bonds below their intrinsic value with the expectation that the market will recognize their actual value & eventually, the price will increase.
The information provided in this article is author’s view & only for educational purposes. By reading this, you agree that the information is not investment advice. Do your research before making any important financial decision. Therefore, FinanceIdeas.org will not be liable for your financial loss.