You are advised to commit to an investment philosophy that emphasises patience, capital preservation, rational decision-making process and discipline. The value investors follow a defined process of analysis of value instead of focusing on the outcomes. From the time when business valuation is considered a blend of science and arts, a person’s analysis is only the best fit approximation than an accurate calculation of the true intrinsic value of a business.
Preservation of capital is considered a name of the entire investment game. You are advised to invest in the capital preservation first and keep the capital appreciation at second. According to Phil Town, the first rule is, never lose money. Value investing provides a satisfactory return as well the safety of principle.
With your investment decision, always learn to be rational, rather than being emotional. Avoid allowing yourself to get caught up in the media hype. You should assess main drivers of business as well as have the discipline in order to ignore the remaining noise. The media should only inform you instead of instructing your investment decision. Consider journalists as journalists only and not stock picks. The disciplined investors always avoid chasing after the current investment fad of the day. Such investors do not abandon an investment at the 1st sign of trouble.
It is highly advised to focus on investing in those companies that have demonstrated over time a consistent ability to increase return on capital and book value. Ideally, return on investment capital (ROIC) and book value per share (BVPS) should be above 10% every year. Consistency is a key.
You should assess the level of long-term debt. Healthy companies must be able to pay off any long-term debt within 3 years from the cash flow projections or current net income. The balance sheet of a company can tell about all assets and debt obligations plus liabilities.
- Margin of Safety
Every value investor searches for the undervalued stocks that do have some future growth potentials. Sometimes, market misprices some high growth stocks that can then be picked up with an acceptable margin of safety as value investments. You must have the discipline to say no. Furthermore, insist on a margin of safety price before purchasing shares. Purchasing stocks in a down market when they are available at a cheap price, limits the downside risk.
It is recommended to use both qualitative measures (technical analysis) and quantitative (fundamental analysis). In order to evaluate a business, you should only pay attention to key variables because other information does not add significant value. Weekly homework on your holdings will be sufficient.
Starting point always matters. When one invests is equally important as how he/she invests. Always try to buy great businesses at sensible prices. The price one pays determines the value he/she receives down the road. Moreover, value investors are often considered to be using buy and hold investing approach.
Try to focus on owning few quality businesses. You can easily keep track of only 4 to 5 businesses instead of dozens in the portfolio. You are advised to wisely allocate your capital and buy shares in increments.
The value investing requires a long time horizon, so patience is a key to success. Prices of stocks are not always rational. The market prices of stocks are based on the sentiment of investors.