A Personal Finance Blog for Malaysian: Most investors know everything about price and nothing about value.

Saturday, December 17, 2011

Most investors know everything about price and nothing about value.

There are many roads to heaven, but when investing in the stock market, we find that, over the long run, it certainly pays to look closely at the stock you are investing in. 

Within this approach, there are many ways to analyse and value stocks. One of the most proven approaches is called value investing. Benjamin Graham was supposed to have pioneered value investing in the Thirties. Since then, modifications have been made and value investing nowadays can take many forms. 

Even Warren Buffett has modified his value investing approach from a strict Graham type to incorporate other features that were mainly passed on to him by Charlie Munger. The primary aim of a value investor is to work out the intrinsic value of a company and then compare this with the price. 

Most investors know everything about price and nothing about value. 

When the market price eventually turns and tumbles, they are shocked and do not know what to do next. As its share price skyrocketed, many so-called investors must have jumped in, probably mesmerised by the ability of its share price to surge higher and higher. As it climbed, investors forgot to look at the foundation that the climb is built on. When the top is heavy and the foundation is weak in relation to the top, the whole thing will crumble. It is not only Lipo that would experience this. Any counter, including Maica and Worldwide, would face the same fate when the top becomes too heavy. The safety that value investing provides is that it reduces the chance that one would be trapped in the crumbled heap. 

Investing in the stock market can sound and look complicated. It need not be. But there are certain basics that an investor must possess, especially if you are doing it on your own. He or she must have the time and discipline to master these basics. The investor must have the minimum skills in accounting and economics. Add in some understanding of human psychology.