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5. Value growth investing for beginners - Duration: 4:55.
Now that we've covered the basics
investing, I'd like to talk about what we
mean by value growth investing.
Value growth investing is a method of
investing that finds businesses with
growth potential and buys them when they're good value.
I've been following this approach for
many years after learning about it from
people like Warren Buffett and Charlie Munger.
But in order for this to work we need
to understand what we mean by growth and
what we mean by value. Growth in anything is
simply ending up with more than you
started with. So a growth company is one
whose value is expected to be greater in
the future so that it could be sold for a
price greater than that paid now.
But deciding which companies are likely to grow
in the future can be tricky and I exclude
financial companies, mining companies and
companies whose profits go up and down
in cycles because these are hard for me to
predict future growth. In general all
investing is about value, we want to buy
stock in a company that's priced lower
than we think it's worth. The problem is
how do we put a price on that value?
Traditionally value investing was about
buying a company for less than its
assets were worth. This was a method that was
taught by Benjamin Graham and initially
practiced by Warren Buffett but these
days it's almost impossible to find
quality companies that are priced below
their net worth. Value growth investing is
about looking for companies that have
growth potential and buying them when
they're good value. The value in this case
comes from the fact that the stock
market is not taking the future growth
potential into account, resulting in the
company being underpriced at present.
So it's more about a misprice of the growth
potential of the company rather than
the mispricing of the assets of the company.
The intrinsic value is the
absolute value of the company, not the
value relative to other companies in the
same industry and not the value put on
the company by the stock market or news
story hype. In the short term a company's
stock price says nothing about the
absolute value of the company.
In the long term it's to be hoped that the stock market
will recognise the absolute value
and provide a good return on the
investor's money.
So how do we calculate intrinsic value?
Well there are various models and calculations
we could use but I don't think trying to
calculate intrinsic value has merit
there are way too many variables and
unknowns instead look at the growth
factors that are important and decide if
these factors are included in the
current stock price. If not then the stock
becomes a possible purchase.
Also decide if too much cash is needed to provide this
growth and if so then the stock
becomes a possible pass. In other words
growth is always a component in the
calculation of value, whose importance
can range from negligible to enormous
and whose impact can be negative as well
as positive. Another important part of
making good investment decisions is
removing emotion from the equation.
Many investors buy on the hype in
financial news and sell when things look
generally bleak. This is a method that
will eat away at your returns, so try not to
get caught up in herd behaviour.
Fear and greed are two main factors behind short-term
price movements and should be removed from the
investors emotional make-up.
Warren Buffett believes that markets are
efficient in the long run but highly
inefficient in the short run and these
irrational prices can be exploited to earn
market-beating returns year-on-year.
To paraphrase Benjamin Graham: in the short
run the market is a voting machine but
in the long run it's a weighing machine.
Value growth companies are expected to
grow in the future and are purchased when
they represent good value for money now.
So how do we find them? I use free online tools
to screen the stocks of a given exchange
looking for factors that indicate
good growth potential.
I exclude companies that may be cyclical
or in industries that I don't feel confident
in understanding. And I then download
financial reports for the past five to
ten years and analyse these in a
spreadsheet I designed to check that
the growth isn't going to come at too
great a price.
Once those checks are
performed I'm left with a handful of companies
to check in more detail, by reading annual
reports and online sources of
information about the company so that I
have a better understanding of the
underlying business.
I don't look at analyst recommendations
since I prefer to do my own research that
isn't clouded by any potentially biased reports.
In the next few lessons I'll
introduce the online tools that I use
to screen and analyse value growth
companies, so that making investing
decisions becomes easy and stress-free.
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ShinigamiAngel: Life is good
NeilPud: What is this camera doing here?
*inspects*
Radially: Shiny!! Wut you doing mah hawt fwend!!
NeilPud: :O
NeilPud: Yes!!! Dance for me!!
Radially: ._.
NeilPud: Hi
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