Friday, March 13, 2015

How to get started with Value investing

Many times I am asked: This is all very good but how can it benefit me? And I was planning to cover this in a short few articles but I was chatting with a friend of mine who said 

“All this motherhood stuff is great but I will only read your stuff if it can benefit me!” 

And this is coming from a guy who has lots of experience in various business fields in various countries for decades. He has probably read more business books than I have seen in libraries and bookstores. This probably means what he is saying might actually have a tiny bit of weight to say the least. You can thank him (or not if you don’t like this section) for this factor being covered over several articles.

First up the question you need to ask yourself is whether you want to execute the strategy yourself or find a manager. The thing is that value investing can be a part time or full time job. Depending on your diligence and discipline the results can vary. If you can spend a few hours every day religiously to the task there is nothing like doing this yourself. Several people who have gotten good at it do this as a profession now. Besides I find it fun and some even tell me that it’s akin to a gambling addiction.

Gambling is defined on Wikipedia as:

“Gambling is the wagering of money or something of material value on an event with an uncertain outcome with the primary intent of winning additional money and/or material goods. Gambling thus requires three elements be present: consideration, chance and prize. The outcome of the wager is often immediate, such as a single roll of dice or a spin of a roulette wheel, but longer time frames are also common ...”

All three elements of gambling are present in value investing – consideration, chance and prize. The thing is that the long term element takes a bit of the element of gambling out of the value investing theory. My rule of not selling out until minimum one year (but try for at least two years) drives this point home. But other than the term of the investment it is very hard to argue that value investing or for that matter any kind of investing as a hobby or a profession is not very different from a gambling addiction. Self proclaimed arbitrageurs will tell you that they are not gamblers as they probability of success is a 100%. The set of situations with a probability of 100% is small and is mutually exclusive from the set of situations found in the investment world. Yes one can get very close to the 100% situation but never have I come across a 100% probability arbitrage trade.

If you are not interested in doing this yourself – don’t think you read this book for nothing. Knowing these principles will enable you to select a good manager. One could make a checklist that outlines the principles in this book but like most things about value investing these principles are not hard and fast. The attributes of a good investment manager are no different from those of a good manager of anything. The main attributes are honesty, diligence, ability to identify mistakes & correction and sticking to the plan.

In the few next articles I will outline a simple few steps that will cover the steps to becoming a good value investor. This by no means is the only way to becoming a good value investor. It is just a rationalization of what I have seen others do and what I have experienced myself. If you have a better course I would love to hear about it (and amend my article alongside).