While some people are drawn to investing for the intellectual process and the journey it offers, for most investors and everyday individuals, it is the financial gains—and the personal benefits they bring—that provide the strongest reason to care about investing. The power of compounded returns is startling and many do not realise what a drastic difference it can make to their lives if taken seriously. Putting aside the investment method of choice, if you could grow your wealth, compounded and uninterrupted, at a rate of 10% annually, and you began at the age of 20 with $1,000, your investment would be worth $117,390.85 by the time you’re 70. It certainly requires a lot of patience, but if you allow even a small part of your wealth to compound and grow, it can bring about vast personal gains in your life. That is why investing is something we should all care about, for those who invest well will certainly have an advantage over those who don’t in the long term when it comes to financial wealth and comfort. Regardless of your age, it is never too late to begin the investing process, while those who are young have a time advantage, there is a Chinese proverb that we would do well to remember:
“The best time to plant a tree was 20 years ago. The second-best time is now.”
To begin with, let us be clear about what we mean by investing. Investing is committing resources in the present with the expectation of receiving a return on this commitment in the future. Furthermore, we view investing as a long-term commitment where the performance of the underlying asset results in the growth of your investment, short-term speculating and trading on price factors only is a different beast entirely. While there are certainly firms and individuals who have profited consistently and greatly with trading and speculating, short-term price movements is not an area we are particularly interested or proficient in, nor is it a path that we would recommend to the vast majority of the population. The data advantage, trading speed, access to markets, financial resources, mathematical genius, infrastructure, and discipline are just a few of the reasons for why there are only a rare few who are able to generate strong positive returns from trading over the long term. Value investing is a far more accessible endeavour that brings with it a track record of successful returns when done correctly. Many of the greatest investors and financial minds have been firm proponents of the underlying theory of value investing for good reason. The returns, intellectual journey, and societal role of value investing are just a few of the reasons why it is a compelling path to go down.
The financial world imposes a range of categories of investing upon us. One example is the positioning of growth and value investing as alternative strategies. Other categorisations revolve around the class of assets being invested in with private equity, venture capital, private credit, distressed debt, commodities, and fixed income being some of the common ones. However, if you take it at a fundamental theoretical level, all good investing is value investing. The simple reason being this, if you are buying something without an idea of its value, of what the asset is or could be worth, you are merely a victim of what the next person is willing to pay for the asset. This may occasionally yield good results, but to predict and be at the mercy of the whims of man tends not to be an enjoyable or fruitful endeavour over the long run. Your returns are rooted in greater fool theory, the hopes that there will be a greater fool who will be willing to purchase off you, rather than in more rational sources of returns. A profit on investment as a result of analysing and understanding an underlying asset’s ability to produce cash from operations is usually far more logical, predictable, and profitable than simply looking at market prices and hoping they will move in the direction you want.
Value can be a subjective term as different people may see different things in the same matter, but in the context of investing, the consensus agreement is that the intrinsic value of an investment lies in the cash an underlying asset can generate for its owner over its lifetime discounted to the present. In theory, it all sounds very simple, price is what you pay, value is what you get, and value investing is when you are trying to pay less than what you are getting. The objective is to identify assets that are trading for less than their intrinsic value and invest in them with the expectation that either the underlying cash produced will provide you with worthwhile positive returns, or the markets will eventually recognise their true worth and adjust the price accordingly. It may sound simple but in reality, it clearly requires a degree of skill or else everyone would be profiting from investing. The difficulty lies in finding and valuing assets better than the market does, and then having the disposition to follow through on your conclusions.
Some general points about value investing should be made quickly:
Macroeconomic factors certainly affect the value of assets and thus a general understanding of how the overarching economy works is essential, however, value investing tends to be a bottom-up approach and it is the core asset in question that is the primary focus, not the overall economy.
Investing in a company means you own a percentage of the shares and therefore, a stake in its rights and business. Take this ownership mindset, combined with a genuine desire to understand everything about the business as if you were a primary owner of the company, and you will naturally achieve a greater level of understanding and mentality of your investment.
Growth is part of value.
Value investing is a process that requires diligent learning and thinking. For those who are not prepared to research and analyse, other alternative paths like passive investing are perhaps a better field of exploration, but that is a field that brings with it its own risks and problems.
While the focus of this primer is on value investing in the context of companies and active stock picking, it is a framework of investing that can be used for anything that requires investment for future return, whether it be other forms of financial assets or personal commitments. Investing strategies and styles will always be in flux, as the world changes, everyone needs to adapt at times, but the fundamental theory of value investing is evergreen for it is rooted in first principles that seldom change. The means change but the ends stay the same.