We all know Warren Buffet, one of the most successful investors of all time. His strategy and skills made him what he is today.
You will be surprised to know that Benjamin Graham is the father of value investing and also the mentor of Warren Buffett, who himself recommends and even use this strategy.
As the name suggests this approach is followed to buy good value stocks. This approach demands estimation of undervalued securities which may outperform in future, because of its strong fundamentals.
Investors have a notion of market overreacting with different scenarios/news making stock price below its intrinsic value. These stocks are pulled out whose price does not correspond to its fundamental values. The sole purpose is to estimate cheap and quality purchase of stocks.
By the term strong fundamental, I would like to put stress, that you as an investor need to look into the core fundamental business techniques of the company, its financial health and sound practices that are followed in critical situations.
It is important to analyze the cash flow and total assets acquired as well as liabilities and debts. Investors develop an understanding of their business and invest in the company rather than their stocks. This type of analysis is coined as Fundamental Analysis.
Basically, the growth potential of any company is estimated here before investing. If a stock is available below its intrinsic value, which means the market has undervalued its price but the company has strong growth potential which is reflected by P/E ratio then it’s a value investing.
One need to understand the balance sheet of last 5 years and how the company is growing and will grow in future. Some other Characteristics include high dividend yield, low price to book ratio, low price to earnings ratio.
Benjamin Graham Propose a number called ‘Graham Number’ which shows mathematical derivative result before finalizing your investment.
Are you the right person? Who should use this?
Do you want to invest for a long term? If yes then you may find this technique useful for you. This will help you to remain free from continuous monitoring of stock price.
If you are willing to be one like Warren Buffet you need to be good enough to perform fundamental analysis of the company. You should have the understanding of business and profit-loss of the company.
The risk involved in such techniques is low as compared to other strategies as risk is the primary concern than the return on investment. Risk gets reduced further with introduction of concept ‘margin of safety’
You need to have the patience to invest using such kind of strategy. This will not help you if you have the urge to become rich quickly. But it is promising and proven strategy that can help you grow money as hell.
- Invest in companies, not in their stocks
- Look for Quality as well as cheap stocks, fundamental should be strong.
- Invest if you have patience, it’s a long game
- Overlook crowd sentiments
- Invest with margin of safety
So to use Warren Buffett’s formula you need to be smart like him. Value investing is one of the best and proven strategies from a long time. If you are good enough to evaluate company fundamentally, you will find this to be the safest way of investment, free from worries of the market up- down.
All you need to do is analyze yourself and make sure this is the best option for you.