Value Investing - another look at the market

Perhaps someone interested in value investing and personal finance! I want to share my knowledge and experience in this area.

The essence of value investing is to buy assets at a price that is lower than their actual value. The real value of assets is determined by cash flow or the ability to maintain value after accounting for inflation.

However, value investing is not pure investing. It is more of a long-term trading or arbitrage between actual value and intrinsic value. The term of the deal can be years.

Not everything called value investing helps the companies you invest in. Most often there is a purchase from other parties who want to sell at certain prices. Your money most likely will not reach the companies (except for IPO cash-in situations). In general, this is similar to the processes of buying used cars, modifying them and then selling them at a higher price. Or, for example, buying old apartments, renovating them and then selling them at a higher price.

Warren Buffett often used the phrase "margin of safety" or "buying a dollar for 50 cents." That is, someone is willing to sell for less than the intrinsic value of the asset. And at that moment, if you see the prospects of the company, you enter it at current prices.

The hardest part about value investing is understanding intrinsic value and learning how to calculate it. But in reality, there is no exact price that is completely correct. There is some consensus, some market expectations. And you need to learn how to determine this cost.

Warren Buffett has also often said that he doesn't need a scale to tell if a person is fat. This was specifically about cost. That is, the undervaluation must be very clearly visible in order for one to want to buy this asset.

If we return to the purchase of apartments or cars for subsequent resale, then a good reseller is distinguished by the ability to navigate the market, knowledge of current prices, as well as the ability to bargain or wait for the optimal price to enter, taking into account the additional costs that the purchase of a particular object, apartment, car imposes .

Investors must understand the market, understand asset pricing, and be able to find or be able to identify situations where the price of an asset in the market is below its intrinsic value.

In the next post we’ll talk in more detail about internal value and basic approaches to calculating it.