Value investing is an investment strategy or paradigm based on the teachings of Benjamin Graham and David Dodd going right back to the major sharemarket crash and subsequent great depression in 1929. In a nutshell, it involves buying shares at prices which are a significant discount to their intrinsic or underlying value based on fundamental analysis.
Buying Australian Shares | Managed Funds | Value Investing | Building Wealth And Income Over The Long Term
Showing posts with label Benjamin Graham. Show all posts
Showing posts with label Benjamin Graham. Show all posts
Sunday, March 22, 2009
Value Investing - Buying Shares For The Long Term
Investors buy shares in Australian companies for many reasons. Some buy stock in a company simply because they think the share price will go up, some may purchase based on the advice of their stock broker and some may even take the plunge based on a tip they received down at the pub on the weekend. However, today I'd like to discuss an alternative approach to the Australian stock market called value investing.
Thursday, June 12, 2008
Australian Stock Market Investing
Investing vs Speculating on the Australian Stock Market.
What is the difference between investment and speculation? Unfortunately many people tend to confuse the terms and even use the two interchangeably. In this post I'd like to put forward my views on what the difference is and how it applies to the Australian Stock Market.
In his book, Security Analysis, Benjamin Graham discusses the difference between investing and speculating at length. Graham describes the difference between the two succinctly using the following words:
I think this sums it up nicely. If you approach each stock market investment with Graham's words in mind, you cannot help but do well over the long term.
The concern I have with speculation is that there is not normally any fundamental basis for entering a particular investment. A stock is bought because there is an expectation that the price will rise (normally over the short term) and it can then be sold at a profit. The problem lies in the fact that the expectation of a rise in price is based on observations of whether the price is rising or falling, or on what the price has done in the past. It seems to be solely about identifying patterns in price and volume.
The issue I have with this approach is that price does not necessarily reflect the value in the company. Over the course of weeks or even days a company's share price can fluctuate wildly without any news from the company in question. Is it possible that the fundamentals of the company have changed so dramatically over such a short period of time? In most cases it's unlikely. Sure - there are cases where a major change in the company's fortunes becomes known to the stock market leading to a change in valuation of the company's shares. But in most cases it's just investor sentiment driving prices.
So the next time you consider the purchase of a company's shares you should bear Graham's words in mind. Do you understand the company well enough to be confident of it's fortunes into the future? Is there sufficient value present to justify the price being asked? If you can't answer yes to both of these questions, should you really be investing? Remember that you can afford to pick and choose. The Australian stock market continues the throw up opportunities for patient investors.
What is the difference between investment and speculation? Unfortunately many people tend to confuse the terms and even use the two interchangeably. In this post I'd like to put forward my views on what the difference is and how it applies to the Australian Stock Market.
In his book, Security Analysis, Benjamin Graham discusses the difference between investing and speculating at length. Graham describes the difference between the two succinctly using the following words:
"An investment operation is one which, upon thorough analysis, promises safety of principal and a satisfactory return. Operations not meeting these requirements are speculative."
I think this sums it up nicely. If you approach each stock market investment with Graham's words in mind, you cannot help but do well over the long term.
The concern I have with speculation is that there is not normally any fundamental basis for entering a particular investment. A stock is bought because there is an expectation that the price will rise (normally over the short term) and it can then be sold at a profit. The problem lies in the fact that the expectation of a rise in price is based on observations of whether the price is rising or falling, or on what the price has done in the past. It seems to be solely about identifying patterns in price and volume.
The issue I have with this approach is that price does not necessarily reflect the value in the company. Over the course of weeks or even days a company's share price can fluctuate wildly without any news from the company in question. Is it possible that the fundamentals of the company have changed so dramatically over such a short period of time? In most cases it's unlikely. Sure - there are cases where a major change in the company's fortunes becomes known to the stock market leading to a change in valuation of the company's shares. But in most cases it's just investor sentiment driving prices.
So the next time you consider the purchase of a company's shares you should bear Graham's words in mind. Do you understand the company well enough to be confident of it's fortunes into the future? Is there sufficient value present to justify the price being asked? If you can't answer yes to both of these questions, should you really be investing? Remember that you can afford to pick and choose. The Australian stock market continues the throw up opportunities for patient investors.
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