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Value investing strategy

value-investors

As mentioned in the article What is financial freedom?, if you want to achieve financial freedom soon, you must start investing early to take advantage of the power of compound interest in increasing your assets.

On the topic of investment, I have a separate article on the Index fund passive investment method specifically for those who have little financial knowledge but still want to invest with a moderate rate of return and low risk.

In this article, I will introduce another very classic investment strategy for those who are more ambitious and want to invest with a higher rate of return - that is the value investing method.

1, What is value investing?

Suppose one day, a "crazy" stranger offers to sell you a $100 bill for only $10. You find this a very good exchange so you decide to pay $10 to get their $100 bill → That is value investing.

what-is-value-investing

In short and easy to understand, Value Investing is an investment strategy based on buying assets that are priced lower than their real value.

Value investing is most often mentioned in the stock market where Benjamin Graham first mentioned it in his book "The Intelligent Investor" and was applied extremely successfully by his student - Warren Buffett in his investment career. However, in reality, besides the stock market, this method can be applied to all aspects of life:

As you can see, value investing is not just a financial investment strategy, it is also a way of thinking that helps us consider investing in things that really bring value to our lives.

2, How to apply value investing strategy?

Nowadays, value investing has become popular and has attracted the attention of many investors, leading to an explosion of documents such as books, articles and videos sharing on this topic. However, not all sources of information are really reliable. Most of the documents today often just repeat the core ideas, then "recycle" them with flowery words, sometimes making it difficult for readers to grasp the true nature of this method.

Based on my personal experience and investment process, I will note my approach along with documents that I think are "worth reading" so that we can learn and effectively apply this investment philosophy.

Step 1 - Gain knowledge

Before starting to invest, we should equip ourselves with 2 things:

In fact, investing does not require you to have a deep understanding of complex financial theories - those are usually the domain of academic researchers. However, to invest effectively, you need to build a basic financial knowledge base . This includes the ability to read and understand financial statements including the asset structure, business results and cash flows of the enterprise. To gain this basic knowledge, find a textbook on how to analyze financial statements (I used to read the Financial Statement Analysis Textbook of the Vietnam National Economics University).

As for value investing mindset, I recommend the following resources:

In addition, there are many sources of documents that we can refer to. However, in my experience, after you learn all of what I have shared above, you will see that the other documents are essentially the same in idea and only have different ways of expression.

Therefore, after having the basic value investing mindset, don't read too many investment books anymore, it is more reasonable to spend time and effort to learn and analyze businesses.

Step 2 - Develop investment criteria

Each investor will have his or her own set of criteria for selecting a business. These criteria will act as a filter to ensure that we only select companies that fit our style and eliminate weak businesses.

investment checklist

We can build our own investment criteria by:

You can also refer to my criteria for choosing a business in the article Business analysis methods!

Step 3 - Business Analysis

This is the hardest job for a fundamental investor because they have to spend a lot of time doing something that can be considered "hard" and "boring".

analysis

Based on the investment criteria we established in Step 2, business analysis here can be understood as studying the business from many different aspects, for example:

For each item, you will have to collect information and analyze many aspects. Because this is not a simple task, each investor needs to practice persistently to improve their knowledge and experience in this job.

You can see how I analyze a business on each aspect here!

Step 4 - Choose the right time to invest

Finally, after carefully analyzing and selecting businesses that meet our investment criteria, wait and enter a position when the business capitalization is cheaper than our valuation by a safe price range (usually 20% lower than the real value of the business).

Always remember that a good business is not necessarily a good investment, it must come with the condition that the capitalization of that business must be cheap enough to buy . Be careful and calculate exactly the time and price range that we start investing in the business.

what-is-value-investing

There may be times when we have to wait a long time for the asset price (stock price, real estate price, etc.) to be discounted enough for us to buy at a cheap price. Don't be impatient, always be disciplined - it will help you protect yourself.

What if we wait too long? - Take that time to analyze other businesses and prepare a list of quality businesses so that you can be ready to act when an event occurs that causes assets to sell at bargain prices.

Bottom lines

So, through this article I have shared the most basic ideas and approaches so that we can learn and apply the value investing philosophy to our investment work.

Because this is a very large topic, I will share more details about aspects of this investment method such as mindset, how to choose a business, how to value it,... in other articles.

Thanks for reading my article!

Kim,

25/12/2024