Value Investing: Principles and Success Stories in the Share Market

Value investing is a fundamental approach to investing in the share market that focuses on buying stocks at a discount to their intrinsic value. This method has been a cornerstone of successful investments, particularly evident in the journey of a Nepal degree holder turned investor. By understanding and applying the principles of value investing, one can navigate the turbulent waters of the share market more confidently.

Understanding Value Investing

The essence of value investing can be traced back to the writings of Ben Graham, mentor to the legendary Warren Buffett. The core principle is to buy a dollar of accounting value for seventy cents. This discount provides a buffer against market volatility and ensures an intrinsic safety net for your investments.

While value investing primarily involves undervalued securities, there is another school focusing on valuing innovation. However, this strategy is more aligned with the 'growth' school of thought. The focus here is on the potential future value of the innovation, which may not be directly reflected in current share prices.

Key Principles of Value Investing

When choosing stocks, it is essential to adhere to certain principles. These principles are simple yet crucial for long-term success. The two main aspects to consider are 'what' and 'why'. Here’s a detailed breakdown:

What You Are Buying

Well-established companies Fundamentally sound companies Companies with strong management and a clear vision for the future Companies with minimal debt Companies with sufficient liquidity to handle any adverse situations Stocks with positive momentum

Why You Are Buying

Determined target for the holding period Clear expectations of returns

Maintaining a clear mindset and being patient are critical aspects of value investing. Before making any moves, consult your broker for guidance.

A Personal Journey in Value Investing

After a devastating loss of 300,000 in a mutual fund managed by an investment advisor, I embarked on a new path of investing, heavily influenced by my experience in commercial credit risk scoring. Traditional investment strategies such as active management and attempting to predict stock movements proved futile. By applying the same risk assessment techniques used in commercial risk scoring to the share market, I developed an investing methodology that focuses on undervalued stocks with strong financials and high dividend payouts.

The key takeaways from my journey include:

Avoiding involvement of financial advisors to minimize fees and charges Focusing solely on 20 diversified and financially strong companies with above-average dividends Avoiding commodity stocks as their financial health is too heavily influenced by uncontrollable world commodity prices Avoiding bonds, ETFs, and preferred shares Never intending to sell common stocks Only investing in stocks scoring above 50, with the highest score of 78 and the lowest a 5

Results and Lessons from Value Investing

My investing strategy has yielded significant results in the long term. Here are some key highlights:

I have lived off my dividend income for over 15 years No changes were made to my portfolio during the 2008 recession Even during the 2020 pandemic, only two out of my 20 stocks reduced dividends The impact of dividend cuts on my income is negligible No changes were made to my portfolio this year, but I keep a cash reserve to supplement dividend income

The stock scoring software I developed has proven to be an effective tool in identifying undervalued stocks. The core principles of value investing continue to guide my decision-making, ensuring long-term stability and growth.

The Spirit of Value Investing

Value investing is not about greed or becoming the richest person in the world—it is about finding balanced and sustainable ways to grow wealth. By focusing on solid companies with strong fundamentals, a clear vision, and a solid financial position, you can navigate the share market with confidence and avoid the pitfalls of short-term speculative investing.

The stock market is not a casino, and careful logical stock acquisitions can reward patient value investors. Embrace the principles of value investing and watch your wealth grow over time.