Short-term investment performance is often influenced by the market's luck and is unrelated to personal ability. There can always be winners and losers in the short term, but long-term winners are rare. This is a core issue in determining value investing: is it luck or ability.
The four principles of value investing.
What is value investing? Value investing was first formed into a system about eighty or ninety years ago by Benjamin Graham. In value investing, the leading and representative figure today is, of course, the well-known Mr. Buffett.
There are only four principles of value investing. The first three are concepts from Buffett's teacher, Benjamin Graham, and the last one is Buffett's unique contribution.
First, stocks are not just securities that can be bought and sold; they actually represent certificates of ownership in a company, signifying partial ownership of the company.
This is the first important concept. Investing in stocks is essentially investing in a company. As the GDP grows and the market economy continues to expand, value will be continuously created. In the process of creating value, as partial owners, the value we hold will also increase along with the company's value.
So, if we invest as shareholders and support the company, then as the company's value grows, we receive the benefits we deserve; this path is sustainable.
What is the right path, and what is the wrong path? The right path is that what you receive is what you deserve, so this kind of investment is a broad and correct path. However, very few are willing to understand stocks in this way.
Second, understand what the market is.
Stocks are, on one hand, a 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 calling prices in this market. So how can this phenomenon be understood?
From the perspective of value investors, the market exists merely to serve you. It provides you with opportunities to purchase ownership and also offers you a chance to sell it later, turning it into Cash / Money Market when you need money after many years. Hence, the existence of the market serves you. This market can never tell you what the true value is; it only tells you what the price is.
Third, the essence of investment is to make predictions about the future, and the results one can get from predictions can never be 100% accurate, but can only range from zero to nearly one hundred.
When making judgments, it is necessary to leave a significant amount of space, called a margin of safety. Since it is impossible to discern things clearly, no matter how confident you are, always keep the margin of safety in mind: your purchase price must be significantly lower than the company's intrinsic value. This Concept is the third most important idea in value investing.
For example, if you are 80% or 90% confident, but since it is not possible to achieve 100%, when that 10% or 20% possibility occurs, the result may still be unfavorable to your intrinsic value. However, if you have enough margin of safety at that time, you won’t lose too much. Require a huge margin of safety every time you invest; this is a skill in investing.
Fourth, Buffett has added a concept through fifty years of practice: investors can genuinely establish their own circle of competence through long-term, persistent effort, achieving a deeper understanding of certain companies and industries than almost everyone else, and can make more accurate judgments about the long-term performance of companies than anyone else. This unique ability is found within that circle.
The most important aspect of the concept of the circle of competence is boundaries. Ability without boundaries is not real ability. If you have a viewpoint, you must be able to tell me the conditions under which that viewpoint does not hold, then it becomes a genuine viewpoint.
If the conclusion is simply told to me in this way, then it must be wrong and cannot withstand scrutiny. Why is the Concept of the ability circle so important? It is because of the "market."
What is the purpose of the market's existence?
For market participants, the purpose of the market's existence is to uncover the weaknesses of human nature. What areas have not been fully understood, and what psychological or physiological weaknesses do you possess, will definitely be exposed in certain market conditions. Everyone here who has ever rolled in the market knows the meaning of what I'm saying.
Value investing is a righteous path, a great way.
These four aspects together constitute the entire meaning and fundamental concept of value investing. The concept of value investing is not only simple and clear to explain but also a great way, a righteous path.
The righteous path is something that is sustainable.
What is sustainable? Sustainable things share a common characteristic: what you gain is perceived by others, by everyone else, as something you deserve, and that makes it sustainable. If you reveal your method of making money without any reservations and everyone thinks you are a fraud, then that method is certainly not sustainable.
If you share your method of making money in every detail without holding back, and everyone admires your method, then this is sustainable. This is what is called the great way; this is the righteous path.
Why is value investing itself a righteous path, a great way?
Because it tells you that investing in Stocks is actually investing in the ownership of a company. Investment first helps the company's Market Cap get closer to its true intrinsic value, which is beneficial for the company.
While you help the company, you are also continually 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 believes that what you obtain is what you deserve. So this is a great path.
Value investing sounds simple but is difficult to execute.
This is the entire philosophy of value investing. It sounds very simple and very logical. But what is the reality like?
In the actual investment process, such investors occupy a very small proportion of the entire market. Almost all theories related to investment have a large number of followers, but true value investors are few and far between. As a result, the characteristic of investment is that most people do not know what you are doing, and the result of investment turns into a wealth killer.
However, there is hardly anyone on the great path of investment, it's very desolate. Where have all the people gone? The side paths are bustling with activity! Why take the small path? Because the main road moves very slowly. We also know in life that the success of a company requires a lot of people, a lot of time, relentless effort, and some luck. So this process is a very challenging one.
Another difficult aspect is that your judgments about the future are also very challenging.
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 non-existent? It is not. In fact, after genuine effort, one will realize that in certain companies and industries, it is quite clear what the worst-case scenario for a company will look like in ten years. It could be much better than that. However, this requires many years of persistent hard work and diligent study to reach such a level.
When a judgment can be made, the ability circle begins to be established. This circle starts off being very narrow, and the time needed to build this circle is very long. This is why value investing is a long journey; although it will definitely reach its destination, most people are unwilling to undertake it. It does take a lot of time, and even with a lot of time spent, there still is very little understanding.
Anyone who exceeds their ability when drawing their circle will ultimately destroy themselves in some market environment. The market itself is a mechanism for discovering your weaknesses.
The fundamental requirement for working in this industry is to be someone who is completely, one hundred percent honest in knowledge. One must not deceive oneself, as oneself is actually the easiest to deceive, especially in this industry. As long as one sits here, one can tell others lies, and after repeating the lies enough, even one begins to believe them. However, such a person can never become an excellent investor; they will definitely be completely ruined in a certain market condition.
A broad road is reserved for those who persevere.
The road of value investing seems like a broad road, but in reality, it is very far from success.
This is because the market always gives the impression that short-term profits can be made, leading everyone to prefer to invest their time, energy, and intelligence in short-term market predictions. This is why people are willing to take shortcuts and are unwilling to take the main road. However, almost all shortcuts end up being forbidden paths.
Therefore, we see that in the long term, at least in the trading records of the United States, almost all various so-called Global Strategies aimed at short-term trading have almost no long-term success records. Those who have truly long-term and outstanding investment records are almost all value investors.
Short-term investment performance is often influenced by the market's luck and is unrelated to personal ability. There can always be winners and losers in the short term, but long-term winners are rare. This is a core issue in determining value investing: is it luck or ability.
The market can have an average cumulative return of 14% over a continuous 15-year period. At this point, you don't need to be a genius; as long as you are in this market, your performance can be very good. However, there can also be times when the market has negative returns for many consecutive years; if you achieve excellent returns during such a period, then it would be quite different.
Although this broad road will definitely lead to success, and the traffic is not congested at all, very few people walk it, and those who successfully travel this path truly receive the success that others believe they deserve.
Is investing always stepping on a landmine?Futubull AI is now online!Providing precise answers, comprehensive insights, and grasping key opportunities!
Editor/joryn
