5 Value Investing Principles Must Know: Investment is often interchangeable with speculation in the online stock trading world. However, it is the most dishonourable thing to use these terms like this. These are two completely different terms and have different goals. We do speculations not the investment in the casinos. ‘Investment’ is a long-mindset thing, and not everybody can understand it.
The investment giant and Warren Buffet’s teacher, Benjamin Graham, developed the value investing strategy for the same. He knew the power of long term investment, and soon Buffet also realized and followed him.
However, Benjamin has five fundamental principles for his investment strategy. In this article, we would discuss them. These principles might not guarantee returns but will surely help you become a better trader.
5 Online Stock Trading Principles of Value Investing
1. The Principal of Margin
In our previous post on Value investing, we discussed the idea of margin of safety. It is the difference between the actual value and current market value of a company. One should look for a high margin of safety organizations. But, how to find one is the real question! You can use different fundamental and technical analysis tools and indicators to examine a firm.
For instance, in 2003, Apple Inc. had more cash in hand than its whole market capitalization. Do you see here how the opportunity is screaming? You only need to find them; they are already there!
2. Value Investing is not Speculation
Another principle by Graham Bell was the clear difference between the value investing & speculation. According to him, ‘speculation’ is a short term approach, while investing is a long term thing. The former includes stock trading with price fluctuations for already established companies while the latter doesn’t require even an above-average company.
One only needs to invest in an organization which is trading below its value. It is the only criteria.
3. Approach the market as an Antagonist
The next investing principle on our list requires you to have a contrarian mindset. Contrarian is a person who generally doesn’t accept the popular opinions and beliefs.
Moreover, to find an undervalued stock, you need to have this antagonist approach. The reason is if you think like everyone else, then you will get what everyone is getting. You need to pick stocks which most investors are ignoring.
Also, it is not sure that your selection will always be beneficial. But guess what? Nor you need all of them! If 50% of your picks work, then your win rate would be unmatchable.
4. Analyze Rigorously
As an investor, it is your inherent duty to analyze a stock in depth. You need to know, on what, you are investing. Why are you investing? Who are the competitors? What does the company do? Have the answer to all these and more questions.
The annual report is not just a piece of information; it includes the past, present, & future of the organization. Read about the company, its annual reports, news, events, and anything related to it. Moreover, if any negative change happens, be ready to reexamine your portfolio.
5. Better Returns
Most investors are not able to outperform stock market returns. In other words, the stock market trading as an aggregate also grows at a specific rate. And, the average market return rate is around 10-12% in the long term. A trader can easily invest in the aggregate market by purchasing index funds. An index fund is the aggregate growth rate of top companies of any country.
However, most investors want to earn more than this rate, and in the chaos of this, they end up getting less than that. Therefore, keep in mind, if you have decided to build your portfolio, and not choose index top companies funds, then you must outperform it. Otherwise, it is better to spend in the market as an aggregate.
Value investing sounds easy, but it is not!
So, these were the five principles of Value Investing – the online stock trading strategy. These principles will help you prevent pitfalls while investing. Just make a bookmark of this post or note them somewhere so that you have them ready, whenever needed.
The Bottom Line
The principles are timeless and developed after years of observation. A legend like Warren Buffet considers, The Intelligent Investor, as the best book ever written on stock market trading. Ben was great, and there’s no doubt in it. Graham also emphasized identifying which type of trader are you. Are you better at playing with prices or you are a better analyzer, i.e. active or passive investor! The key is to know yourself first and then your investments.
Moreover, before learning any strategy, it is important to learn the basics first. We would even suggest you invest your time before money and believe us; it will give better returns. Read, analyze, and do dummy stock market trading. Develop your technique and then enter the market.