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"A process where after thorough analysis promises safety of principal and a satisfactory return" - Benjamin Graham
Warren Buffett once said that the secrets to investing has already been revealed many years ago. Yet,the majority of the markets seemed to ignored the right teachings, instead,they prefer to chase hot news and to speculate on the market's daily movements. If you would take some time to do some research, you will find that there are already quite a number of people who are living quite well off because they can profit from the share market consistently using those teachings. What's more, these are just ordinary people without any sophisticated finance degree.
Therefore, I wrote this article to highlight the essence of the teaching : Value Investing, in hope that this will inspire and benefit any aspiring investors to pick up the right investing philosophy and to help them to profit from the market consistently.
There's a difference between investors and speculators. Not that being a speculator is wrong legally or morally, but it is just not my thing, if you would like to live the exciting life of a speculator, that's your call, however, I've never seen a speculator who can profit from the market CONSISTENTLY. A speculator guesses where the price will move tomorrow or in the next week because of some hot news and etc. This ,to me, is equal to gambling and it is just not my thing. I believe the stock market is a respectable place, not a casino.
Do you know what's the worst thing that can happen to a gambler in a casino? They win.
In one trade they may make explosive profits of over 1000%, then, feeling confident and invincible,they might borrow more in the next trade in hope or making even more money, unfortunately, many of them end up in huge debt when their trade turned sour.
If you want to be an investor, here's how:
An investor only make a trade after the following aspects are analysed thoroughly:
Management of the Business
Market Price VS Business Value
Only invest in a business you understand, shares are a claim of piece of ownership of a business. Would you invest in a business you don't understand (Say, Six Sigma Consultancy Firm -Whatever it is) in real life? When you purchase a business, of course you would like to know what is the business about, what is the mechanics of the business, what will affect the business,why do this business stand out in its industry and where will the industry be in a few years right? Why do most people not do the same when purchasing shares?
Management of the Business
If you have a cash churning machine (Business), you need someone to run it. That someone is the management. Would you allow an incompetent and dishonest people to run your machine (Business). No, right? This is because chances are,not only will they ruin your machine and but they will also keep some of those cash into their own pocket instead of yours.
A business can look like its thriving but still roll up in the end. Why? Cash flow Problem. A business can be making paper profit and generating good earnings on paper and still have liquidation issues. Why? Some of these businesses might be getting good business because they have a long receivables term. Some of these businesses might be taking on too much debt to fund their projects and when the project turned sour, they struggle to pay back the debt (With Interest). There are so many things you can infer from the financial statement. Once you know how to read the financial statements, an annual report will become like a story book to you.
Market Price Vs Business Valuation
Once you understand what's going on with the business, you can roughly figure out how much the business is worth using some valuation methods. Then, what you need to do is to compare what is the business selling for and what is the value of the business. If you find that the value of the business is far greater than the asking price of the business, you may put the buy order.
It's just that simple. Even though I did not go into the details of each of these aspects, but this is roughly what investing all about. Note: You don't even need to look at the price chart.
"There seems to be a perverse nature that likes to make easy things difficult" - Warren Buffett