Benjamin Graham's Simple Principles of Value Investing
By William Wilkie
When it comes to investing in the stock market, there is still no better teacher than Benjamin Graham. He was a British born American investor that lived from 1894 to 1979 and was the reason for the success of such investors as Warren Buffet. He wasn't just a theorist either; he made millions for himself and billions for his disciples.
His reason for successful investing was through value investing. Basically, it means finding shares in companies that are trading below their intrinsic value. This may seam like a deceptively simple formula, but it worked in his day and it still works today.
Intrinsic Value of a Share
So, first let me define what the intrinsic value means. Graham defined this as the value put on a share by the facts as opposed to the value set by the irrational and emotional unpredictable market. The facts are defined as earnings, assets, dividends, prospects, and the management quality of the company.
Obviously, the intrinsic value is not completely stable as it will fluctuate as events affect the company year by year. On the other hand, the market price is a lot more volatile as it is determined by such things as trends, the herd mentality of investors, and the overall market movements. The secret lies in knowing the difference between the more stable intrinsic value and the fluctuating share price and acting accordingly.
Value Investing is Based on Fundamental Analysis
Fundamental analysis is the studying of the economy, the industries, and the individual company to arrive at a value of the share price. With this type of analysis it is possible to find the undervalued shares which are ripe for the taking, or a "buy" situation.
There are however some points that need to be considered; mainly the efficiency of the markets. Although the theory is considered to be correct, there are outside factors that can't be controlled - namely insider trading and human mistakes in the methods and interpretation of the data analysed.
Another problem with fundamental analysis is that when there is continuous analysis of certain industries or companies, the prices can be influenced by the decisions of the stockbrokers and investors acting on the results of the analysis.
The Solution to Influenced Prices
One solution is to look for smaller or medium sized companies that are likely to outperform the market. These companies might be flying under the radar as there will be much less analysis of these companies and therefore the price of the shares will not be influenced by the analysts.
Another opportunity is to find a company in its early days that looks like it will become a "shooting star." Many companies start out because they have discovered a new or profitable market niche with little competition. They grow during the creative initial period and then experience a period of rapid growth and acknowledgment in their field. The next phase is the critical one; when competition emerges the company will be either doomed to failure as they try to diversify into less profitable areas or they will continue on their successful drive forward and continue to grow. Finding these growth driven companies in their early days and holding on to the shares is an investors dream.
William Wilkie enjoys writing about personal finance and investing. Visit his website for Personal Finance Reviews where you will find reviews about the 37 Days to Clean Credit program which is designed to repair your credit history and raise your credit score.