The Intelligent Investor - Benjamin Graham (Part 2)

The Intelligent Investor - Benjamin Graham (Part 2)

Part 2 of this 2 introduces the basic principles of value investing. Based on that, you can find methods to determine the appropriate value for myself.

Two fundamental principles of value investing.

Many people mistakenly believe that value investing means calculating future cash flows discounted to present it as in the example I presented. Not so. That is just one of the methods usually applied alone.

 Charm of value investing theory lies in its simple principles. In part one I mentioned first principles: the relationship between the market price and value. This section will introduce two basic principles remain.

Safety margin (Margin Of Safety)

If analyzed carefully reviewed her in Part I, we will see the following:

- The amount actually paid in the future is predictable, in fact, the amount that may be different.

- Level of "growth" can not pay to be 25% / year. There are many risks: bad company to do business, the economy went down, she was mistaken about his ability ...

- The percentage used to discount (8% / year) can also be different.

Just one of these factors occur, the results certainly final value will be different. Generally a lot of the same analysis, each case will be the result of different values. And people can always get errors when calculating and comments.

 So Graham proposed rule safety margin (BDAT) when investing: invest only if market prices lower some significant value, about which called BDAT. If BDAT larger the case that the more attractive the investment.

In other words, the problem is not calculated to find the most accurate value, because it is impossible. Instead, we just try to set prices that approximate figure (correct probability as high as possible, but can not be 100%). The issue is more important to have real BDAT requires high investment to make, to "compensate" for the errors that inevitably valuation. According to Graham, a transaction that is not BDAT trading investment that is not true.

Recently I talked to a buddy. He asked me the following:

- X is a market share price on the OTC market is 32-34. I priced it about 22 only. So there should not buy?

- If you feel good, then X can consider buying. "I replied lazily."

 I wait to buy it down to about 30 then. "He's excited."

- WHAT GIIIIIIIIIII ... - I shouted - If you think it's value is about 22, then you should buy it only 16-18. The gap is 4-6 BDAT. Even if the market price is 22, then do not buy, because BDAT only 0. DO NOT HAVE light rain! - I BUZZ generator via Yahoo Messenger.

Many people, though very high level and that they understand investment analysis, did not know anything about BDAT. See for example the newspaper Tuoi Tre, just confusing article has mislead the reader in place: unspecified error can be calculated and in how BDAT is appropriate. If the author can tell that by his BDAT 0 and compute its 100% correct, then perhaps the author will soon become the richest man in Vietnam tomorrow.

Keep in mind: BDAT greater the investment more attractive. Play simple, is not it? Who does not know that? Then you look at the people around playing stocks. Instead BDAT positive expectations, they are willing to accept BDAT sound like my friend. Think BDAT is 0 is completely crazy, not to mention sound BDAT!

 And if next week X stock prices from 32 up to 40, his BDAT reduced from -10 (= 22-32) to -18 (= 22-40). I'm sure he will be more excited and want to buy stocks that X is extremely attractive! Well, X is very attractive, but attractive to him for making a loss, but not attractive to investors.

You might counter that at the present time, it is difficult to find stocks with positive BDAT because stock prices are rising rapidly that. If you just look at the market price never know the BDAT. It should not be hard to find out its value again.

I recounted my experience. A lot of people will probably laugh at me because of the stubborn always require high BDAT did I miss many opportunities for profit. Yes, I am really after the shot missed my chance. I've missed not buy FPT when its price is at around the 80-90 thousand (par value adjusted by 10 thousand) to then climb FPT time of over 600 thousand (almost 700%). I also miss not buy it when the price TDH 70, TDH then saw the bourse for 300. Not at all. I keep SAM in a long time, then decided to sell, and SAM witnessed nearly 3 times then. I even held it above 40 VF1, then saw it reduced to 16, but I'm still not sold and held until now. All these phases are missed opportunities because I stubbornly high BDAT requirements.

Some people have even said that no one can fool than me. : P Well, I admit I was stupid, but luckily I do not let her fool more. What is more stupid? Stupid than when I sold all my stocks to rush in to buy stocks that I believe BDAT is not even a sound. Up to this point, except for the broken phase in the feed, the stocks that I require high BDAT giving very satisfactory results.

The reason most of Graham's students are successful because they understand the BDAT. After stepping out from "furnace" of Graham, each student will find a business valuation methods consistent with their own. Some people use the discounted cash flow method. Someone determined by evaluating the value of all assets of the business is. Someone is always calculated intangible value (corporate brand) when valuations. Notably with Buffett was particularly successful because the two schools combined value investing and growth investing (inherent in all people are completely opposite, I will present the opportunity for increased investment Head back). Even Graham also introduced a number of specific methods in the book "The Intelligent Investor". Every student who owns an "attack" on its own price, to fit with their own strengths and increase the accuracy of the valuation. Although they use tactics that they finally comply with a principle: to require higher BDAT.

 Next time when someone to teach you about analyzing the school stock value (or fundamental analysis), if they only teach you about PE, PEG, PB, DCF ... without saying anything to BDAT, do not believe them. If you only know the way in which the mind does not know the law, you can only earn Shandong Forever Vo coins through a single day.

Warren Buffett has stated a very interesting image. If you need to build a bridge for trucks of 10 tons to go through, you have to design and construction of bridges to withstand 15 tons. Part 5 tons of BDAT it is. Whether you are smart to where they can not predict future events: extreme weather, a car load cheat, ... If you build bridges stubborn weight 10 tons or less, sooner or later will collapse shattered bridge. This case is especially true when you are in Vietnam.

     She even sold pho year knows that the seller pay some challenges. If the item price markup is 200 thousand, while it is believed that only three years worth 30 thousand, then three years will make the initial cost is 5 thousand! But people do not know it will pay off the initial price is equal to 30 thousand. Meanwhile the final purchase price will definitely bigger than 30 thousand.

Benjamin Graham always remind students of BDAT, the year she was reminding me that "you have to know how to hold the handle."

The mayor (Mr. Market)

I often hear people complain that there is no fundamental analysis hunting ground in the Vietnam market. They go to school for that class of those securities analysis applies not done anything. For example: why Z shares are pretty basic indicators that keep prices low sporadic? They said that it is now only interested in market prices alone, one based on investment value where they do cost analysis for fatigue value.

Again, the only school that has the abilities of mind. Also BDAT, Graham also proposed a rule again: Mayor (Mr. Market).

To understand this principle, rather than equity, you imagine yourself owning a piece of land left by his father. Of course, you can easily know the true value of the land is more than the value of the stock. Also, imagine the stock market as a neighbor - he called Market - who also has a plot of land next to you.

Every day, Mr. Market will come to your doorstep to give a purchase price of your land, or vice versa, you can buy his land if the price reasonable. Though both are the same piece of land and terrain of the area, but the price at which he launched Markets fluctuate each day.

Only thing he has psychological Market instability. In a few days he was just seeing all the positive aspects of the land and was excited when he was offered a very high price. Then there are some days, he fell into a state of bewilderment and see all the negative aspects, then he will offer extremely low prices.

In addition, he is also staying Market. If today you refuse the transaction, then the next day he came to the door to greet the different price, higher or lower, depending on his mood that day. He was never interested in the real value of the land.

If you do not understand the value of the land, you have to be careful with the mayor. We can show psychological instability will spread from his past to you. Then you could buy land to sell his or her land with the wrong price.

Warren Buffet has the following advice: in front of the mayor is to serve you, not to guide you from what you need is his pocketbook, not his wisdom a language. If you believe the price he made too high compared to the actual value of the land, you can casually reject the transaction, or even be able to sell their land immediately. Similarly, when he was bewildered extreme, you can take advantage of the opportunity to buy his land immediately.

Graham said that you should focus on finding the difference between the market price and value, and when there are relatively large BDAT investment is made immediately.

Then you do not get to the daily fluctuation of the market prices affect the decision to buy / sell her. Even you have to expect that fluctuation. In short, the difference between the market price and value always exists, but in the long run they will come together. You can earn higher returns than average if the market that take advantage of the time difference there. To achieve that, you have to know how to avoid the psychological impact of the mayor.

 The story also shows why most people are successful when investing in property or piece of land for his long-term future (As such my grandmother, she had not learned through the investment analysis at all but you can still pick out high-value homes). In fact, he had not been disturbed Market every house on the property. Unfortunately if they can be traded through the house every day, or even worse, they can be divided into several parts house instead of the original transaction basis, probably most of them would fail when investing in real estate.

 When you buy any stock, write down on paper how you calculate the value. If the market price of the shares reduced by half, do not panic. Take a look back at that paper, to see how it was calculated correctly. If you still believe it's true, you can have 2 options:

1. Regardless of the current market price. In this way, the long run you will get satisfactory profit level (as in the previous article).

2. Take that money to buy more shares.

Table of Contents:

The Intelligent Investor - Part 1

The Intelligent Investor - Part 2

The Intelligent Investor - Part 3

Source: http://tobecomeabillionaireonline.blogspot.com