Shepherd Boy
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This is the continuation of my previous thread on “Financial Planning 101”.
In my previous thread, i touched on the importance of having insurance. Somehow it was being under “review” and subsequently i was banned for the reason of having “Unsolicited Content (Commercial solicitation / Ads / Referrals / Spam)”.
As i mentioned right from the beginning, the reason for posting this thread is my way of “giving back” to the society (after having been in the industry for 20 years and counting).
So here it goes again, i would like to continue on the topic of Finanicial Planning 101.
Part 3- Investment Planning
Just like the previous thread when i talked about insurance, I zoomed in on the importance of having an Integrated Shield Plan (aka “IP”). Today i just want to focus on Stock Investing which is one of the wide range of products we can choose from in the process of Investment Planning. And out of so many styles of Stock Investing, i just want to talk about one that has benefited me greatly by using it’s concept called: “Value Investing”.
According to Investopedia, “Value Investing” is defined as “an investment strategy where stocks are selected that trade for less than their intrinsic values. Value investors actively seek stocks they believe the market has undervalued. Investors who use this strategy believe the market overreacts to good and bad news, resulting in stock price movements that do not correspond with a company's long-term fundamentals, giving an opportunity to profit when the price is deflated.”
In short, using the layman’s term, this is what you called “buy low, sell high!”
However, to fully understand how it really works; one must first understand the concept underlying it’s philosophy. This concept which was made popular by the late Benjamin Graham, who was dubbed “the Father Of Value Investing” as well as Warren Buffet’s mentor is commonly known as: “Margin Of Safety”.
Basically how it works is like this:
Say you have done your homework through research and study (by analyzing its fundamentals using “Discounted Cash Flow”, “Dividend Discount Model”, or basing estimates on P/E. PEG ratio and what have you) and have finally come up with a fair “intrinsic value” of a company. If the market price of the company falls below it’s intrinsic value by just a little, you should then just wait and see in hoping that it will drop some more, and more and more.. In other word, you will only buy it when the price is far below it’s intrinsic value. Hence, the difference between the intrinsic value of a stock and its market price is what you called “Margin of Safety”.
Warren Buffet best illustrates it like this:”You have to have the knowledge to enable you to make a very general estimate about the value of the underlying business. But you do not cut it close. That is what Ben Graham meant by having a margin of safety. You don’t try to buy businesses worth $83 million for $80 million. You leave yourself an enormous margin. When you build a bridge, you insist it can carry 30,000 pounds, but you only drive 10,000 pound trucks across it. And that same principle works in investing.”
By now if you still don’t understand what is Margin of Safety and the concept of it, then think of it like you are running a business. It tells you how much you can lose on your sales before your company starts losing money. Or in Engineering term, Margin of Safety is your Factor of safety (FoS). It’s measured by the amount of extra load beyond the structure of a system could actually carry. Simply put, Margin of Safety is your “buffer”. In other words, it helps you to be more “kiasu”. Just associate the word “Value Investing” with ”Kiasu Investing”, you will have better understanding of it i guess.
Happy Investing!
“It’s far better to buy a wonderful company at a fair price, than a fair company at a wonderful price.”
Warren Buffet
In my previous thread, i touched on the importance of having insurance. Somehow it was being under “review” and subsequently i was banned for the reason of having “Unsolicited Content (Commercial solicitation / Ads / Referrals / Spam)”.
As i mentioned right from the beginning, the reason for posting this thread is my way of “giving back” to the society (after having been in the industry for 20 years and counting).
So here it goes again, i would like to continue on the topic of Finanicial Planning 101.
Part 3- Investment Planning
Just like the previous thread when i talked about insurance, I zoomed in on the importance of having an Integrated Shield Plan (aka “IP”). Today i just want to focus on Stock Investing which is one of the wide range of products we can choose from in the process of Investment Planning. And out of so many styles of Stock Investing, i just want to talk about one that has benefited me greatly by using it’s concept called: “Value Investing”.
According to Investopedia, “Value Investing” is defined as “an investment strategy where stocks are selected that trade for less than their intrinsic values. Value investors actively seek stocks they believe the market has undervalued. Investors who use this strategy believe the market overreacts to good and bad news, resulting in stock price movements that do not correspond with a company's long-term fundamentals, giving an opportunity to profit when the price is deflated.”
In short, using the layman’s term, this is what you called “buy low, sell high!”
However, to fully understand how it really works; one must first understand the concept underlying it’s philosophy. This concept which was made popular by the late Benjamin Graham, who was dubbed “the Father Of Value Investing” as well as Warren Buffet’s mentor is commonly known as: “Margin Of Safety”.
Basically how it works is like this:
Say you have done your homework through research and study (by analyzing its fundamentals using “Discounted Cash Flow”, “Dividend Discount Model”, or basing estimates on P/E. PEG ratio and what have you) and have finally come up with a fair “intrinsic value” of a company. If the market price of the company falls below it’s intrinsic value by just a little, you should then just wait and see in hoping that it will drop some more, and more and more.. In other word, you will only buy it when the price is far below it’s intrinsic value. Hence, the difference between the intrinsic value of a stock and its market price is what you called “Margin of Safety”.
Warren Buffet best illustrates it like this:”You have to have the knowledge to enable you to make a very general estimate about the value of the underlying business. But you do not cut it close. That is what Ben Graham meant by having a margin of safety. You don’t try to buy businesses worth $83 million for $80 million. You leave yourself an enormous margin. When you build a bridge, you insist it can carry 30,000 pounds, but you only drive 10,000 pound trucks across it. And that same principle works in investing.”
By now if you still don’t understand what is Margin of Safety and the concept of it, then think of it like you are running a business. It tells you how much you can lose on your sales before your company starts losing money. Or in Engineering term, Margin of Safety is your Factor of safety (FoS). It’s measured by the amount of extra load beyond the structure of a system could actually carry. Simply put, Margin of Safety is your “buffer”. In other words, it helps you to be more “kiasu”. Just associate the word “Value Investing” with ”Kiasu Investing”, you will have better understanding of it i guess.
Happy Investing!
“It’s far better to buy a wonderful company at a fair price, than a fair company at a wonderful price.”
Warren Buffet
