Source: Qilehui.

1. Four Concepts of Value Investing

So what is value investing? Value investing was originally formed about eighty to ninety years ago by Benjamin Graham. In value investing, the key figures today, the representative figure of course being the well-known Mr. Buffett.

Value investing has only four concepts. Remember, only four. The first three are concepts of Benjamin Graham, Buffett's mentor, and the last one is Buffett's unique contribution.

First, stocks are not just tradable securities; in fact, they represent certificates of ownership in a company, indicating partial ownership of the company.

This is the first important concept. Investing in stocks is actually investing in a company. As the company grows along with GDP in a continuously growing market economy, value itself will be continuously created. So in the process of creating value, as partial owners, we also hold a portion of the value that will increase along with the company's value growth.

So if we invest as shareholders and support this company, then as the company's value grows, we will receive our rightful share of the benefits, and this path is sustainable.

What is the right path, and what is the wrong path? The right path means what you get is what you deserve, so this kind of investment is a great path, a right path. Unfortunately, there are very few people willing to understand stocks in this way.

Secondly, understanding what the market is.

Stocks are on the one hand partial ownership, and on the other hand, they are indeed a tradable security that can be bought and sold at any time. There are always people making bids in this market. So how to understand this phenomenon?

From the perspective of value investors, the market exists only to serve you. It can provide you with opportunities to acquire ownership and also give you a chance to sell it many years later when you need money, turning it into cash. So the market exists to serve you. This market can never tell you what the true value is, it only tells you what the price is.

Thirdly, the essence of investing is to predict the future, and the results of predictions can never be one hundred percent accurate, only ranging from zero to close to one hundred.

When making judgments, you must always leave a large margin of safety. Because you cannot distinguish, so regardless of how confident you are, always remember the margin of safety. Your purchase price must be significantly lower than the company's intrinsic value. This concept is the third most important concept in value investing.

For example, if you have an 80% or 90% certainty, but because it's impossible to reach 100%, when that 10% or 20% possibility arises, this result is still unfavorable to your intrinsic value, but if you have enough margin of safety at that time, you won't lose too much. Each time you invest, you should demand a huge margin of safety, which is a skill in investing.

Fourthly, Buffett, through his 50 years of practice, has added a concept: investors can truly build their circle of competence through long-term and relentless efforts, gaining a deeper understanding of certain companies, certain industries than almost everyone else, and making more accurate judgments on the long-term performance of companies than almost everyone else. Within this circle is your unique ability.

The most important aspect of the concept of a circle of competence is boundaries. An ability without boundaries is not truly an ability. If you have a viewpoint, you must be able to tell me the conditions under which this viewpoint is not valid, then it is a true viewpoint.

If you just tell me that this is a conclusion, then this conclusion must be wrong and cannot withstand scrutiny. Why is the concept of a circle of competence so important? It's because of the "market".

What is the purpose of the market?

For market participants, the purpose of the market is to discover human weaknesses. Whatever areas you have not really understood, whatever psychological or physiological weaknesses you have, will definitely be exposed in a certain state of the market. Everyone who has ever rolled in the market will surely understand the meaning of what I am saying.

2. Value investing is a righteous and broad path.

The above four aspects together constitute the entire meaning, the most fundamental concept of value investing. The concept of value investing, not only sounds simple and clear, but it is a broad and righteous path.

The right path is something sustainable.

What kind of thing is sustainable? Sustainable things all have a common characteristic, which is that what you get is considered deserved by others, by everyone else, making it sustainable. If when you share your money-making method without reservation, everyone thinks you are a scammer, then this method is definitely not sustainable.

If you share your money-making method bit by bit without holding back to everyone, and everyone thinks that your money-making method is true and good, admires it, then it is sustainable. This is called the right path.

Why is value investing itself the right path, the right way?

Because it tells you that investing in stocks is actually investing in the ownership of the company. Investing firstly helps the company's market cap to align closer to its true intrinsic value, which is beneficial for the company.

While helping the company, you are also constantly growing your own intrinsic value, ultimately helping the economy, helping the company, helping individuals, and in this process, helping yourself. Thus, the returns you receive are what you deserve, and everyone also thinks that what you receive is what you deserve. So, this is the right path.

Value investing sounds simple but is difficult to execute.

This is the entire concept of value investing. It sounds very simple and very logical. But what is the reality?

In the real investment process, the proportion of such investors in the entire market is very small, extremely small. Almost all theories related to investment have a bunch of followers, but true value investors are very few. So the characteristic of investment is that most people don't know what you are doing, and the result of investment turns into a wealth killer.

On the road of investment, there are basically no people, very quiet. Where did everyone go? It's bustling on the side roads! Why take the side road? Because the main road is slow. We also know in life that the success of a company requires many people, a lot of time, relentless effort, and some luck. So this process is a very difficult one.

Another difficult aspect is it is also very difficult to predict the future.

The skill of investment is to predict the future, truly understanding a company, an industry, being able to judge its situation in the next 5 or 10 years. There are too many uncertainties, most industries, companies cannot predict that far.

But is it completely impossible? Not really. Actually, after you really put in the effort, you will find that in some companies, in some industries, you can see very clearly what the worst scenario for this company will be in ten years? It could be much better than this. But this requires many years of relentless effort, many years of hard study, to reach this level.

When you are able to make this judgment, you start to build your own circle of abilities. At the beginning, this circle must be very small, and it takes a very long time to build this circle. That's why value investing itself is a long journey, although it will definitely come to an end, most people are unwilling to take it. It really takes a lot of time, even after spending a lot of time, the understanding is still very limited.

Those who draw a circle beyond their abilities will eventually completely destroy themselves under certain market conditions. The market itself is a mechanism for discovering weaknesses in you.

The most fundamental requirement in this industry is to be a complete and fully honest person in terms of knowledge. Absolutely do not deceive yourself, because in fact, you are the easiest to deceive, especially in this industry. As long as you sit here, you can tell others lies, and if you tell lies too often, even you will believe them. But such a person can never become an excellent investor and will definitely be completely destroyed under certain market conditions.

4. Kangzhuang Avenue is left for those who persist.

The road of value investing seems like an avenue of Kangzhuang, but in reality, success is very far away.

Because this market always makes people feel profitable in the short term, everyone tends to hope to put their time, energy, and intelligence on short-term market forecasts. This is why everyone is willing to take shortcuts instead of walking the main road. In fact, almost all shortcuts have turned into detours.

So we see that in the long term, at least in the trading records of the USA, almost all kinds of so-called strategies and tactics aimed at short-term trading have hardly any successful long-term records. And those truly long-term, outstanding investment records, almost everyone is a value investor.

Short-term investment performance is often influenced by the overall market luck, not by your personal abilities. In the short term, there can always be winners and losers, but in the long term, winners are very few. This is a core issue in judging the value of investment, luck or ability.

The market can have an average cumulative return of 14% over a continuous period of 15 years. At this time, you don't need to be a genius at all, as long as you are in this market, your performance will be very good; but sometimes in the market for more than a decade, the returns are negative, if your returns are excellent at this time, it's different.

Although this Kangzhuang Avenue will definitely lead to success, and the traffic is never congested, there are very few people walking on it. The success achieved by those who have gone through it is indeed what others consider as their well-deserved success.

Editor / jayden