There exist several ideas central to value investing:
1. Concept of Mr Market
This concept of Mr Market is first coined by the father of value investing, Benjamin Graham. He tells of this story where the stock market is like a salesman named Mr Market who suffers from extreme mood swings. Every day, Mr Market will unfailingly come knocking at your office. If he feels extremely optimistic, he will offer businesses for sale at a high price to you with a very convincing pitch that he knows the company will soar towards stellar heights come tomorrow. And there will also be days when Mr Market will come to you with a very depressed sentiment because there’s a riot happening on the other end of the planet; he will probably offer the same businesses at incredulously low prices even though the business is still overflowing with endless streams of income.
The relationship between the value investor and Mr Market
The value investor is not to partake in Mr Market’s fleeting moments of optimism and depression. What he has to do is to perform his own independent evaluation and use Mr Market to his own advantage – by either buying excellent businesses at rock-bottom prices, or to sell off businesses at a price that is higher than the underlying intrinsic value.
2. Concept of Margin of Safety
The principle of margin of safety is a concept coined by Benjamin Graham in his authoritative book “The Intelligent Investor”. It states that a transaction to hold a stake in a stock should only be executed when there exists a significant disparity between the price and the estimated worth. This disparity is termed a margin of safety as it provides a tolerance for valuation errors due to ‘fudged’ financial figures and etc.
3. Concept of Circle of Competence
Warren Buffett firmly believed that if he cannot understand the business and its products and services, then he will avoid holding stakes in such companies. Likewise, the value investor should only acquire stakes in business that he understands and is deeply familiar with; the value investor stays within his circle of competence.
1. Concept of Mr Market
This concept of Mr Market is first coined by the father of value investing, Benjamin Graham. He tells of this story where the stock market is like a salesman named Mr Market who suffers from extreme mood swings. Every day, Mr Market will unfailingly come knocking at your office. If he feels extremely optimistic, he will offer businesses for sale at a high price to you with a very convincing pitch that he knows the company will soar towards stellar heights come tomorrow. And there will also be days when Mr Market will come to you with a very depressed sentiment because there’s a riot happening on the other end of the planet; he will probably offer the same businesses at incredulously low prices even though the business is still overflowing with endless streams of income.
The relationship between the value investor and Mr Market
The value investor is not to partake in Mr Market’s fleeting moments of optimism and depression. What he has to do is to perform his own independent evaluation and use Mr Market to his own advantage – by either buying excellent businesses at rock-bottom prices, or to sell off businesses at a price that is higher than the underlying intrinsic value.
2. Concept of Margin of Safety
The principle of margin of safety is a concept coined by Benjamin Graham in his authoritative book “The Intelligent Investor”. It states that a transaction to hold a stake in a stock should only be executed when there exists a significant disparity between the price and the estimated worth. This disparity is termed a margin of safety as it provides a tolerance for valuation errors due to ‘fudged’ financial figures and etc.
3. Concept of Circle of Competence
Warren Buffett firmly believed that if he cannot understand the business and its products and services, then he will avoid holding stakes in such companies. Likewise, the value investor should only acquire stakes in business that he understands and is deeply familiar with; the value investor stays within his circle of competence.
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