Clem Chambers - A Beginner’s Guide to Value Investing

Published by ADVFN

978-1-908756-02-2

Copyright Clem Chambers 2012

http://www.advfn.com

Most people think that investing in stocks and shares is a risky game only played by rich people and gamblers.

From the outside it seems its hard to know how to make money investing in stocks. There are so many stories about people who lose their shirts.

This is true and false depending on what you set out to do.

Investing is not hard but trading shares is nigh on impossible.

Most people confuse the two things: trading is not investing and vice versa.

Trading is very close to gambling and, like betting on horses, it is extremely difficult to make a profit from that kind of activity.

Investing, on the other hand, is quite boring and the more boring you can make it, the better.

Investing is not hard. Making money by investing is not that difficult, but it takes effort.

There are many trading schemes, none of which Im aware are much good at making money.

There are quite a few investing strategies and most will make you money. The simplest and the most tried and tested is value investing.

Value investing as a method was laid out clearly for the first time by an American professor called Benjamin Graham in the 1950s and one of his students, Warren Buffett, used it as the basis for his career in which he has become the richest man in the world.

Value investing is at its heart simple: buy cheap stocks then sell them when they are not cheap any more.

While value investing wont make you the richest person on the planet, it is a platform for good investment profits. The basics can be potted down into a set of simple straightforward methods.

I have followed the principles of value investing for many years and it has always given me excellent profits.

Apart from excellent profits, one key benefit of value investing is that it doesnt stress the investor out. Done properly it is a comfortable way to take risks with your cash.

Most stock market trading and investing ideas are packed with stress and even when these systems are doing well, anyone following such ideas can be put through the emotional wringer. This emotional price is simply not worth paying for most people; it burns them out and dulls their desire to be involved.

The low stress level of a sensible investing strategy is a sign that the investment style you are following is a solid one. Investing should not feel like war, it should just be a normal working endeavour that takes a certain amount of time and effort. It shouldnt be a battle that keeps you awake at night.

Value investing is and should be quite an easy-going way to make money from the stock market.

Being dull doesnt make value investing popular like trading, but it does mean that those that follow this idea make money year in and year out while traders come and go.

If you wish to double your money very quickly in stocks and shares, you should stop reading this book right now. This book is about getting rich slowly, not quickly.

Over twenty years value investing will build wealth, but you will not be rich from it in a couple of years.

A lot of people that trade the markets want to get huge profits, 100% or more in a year. This is basically impossible even if it might seem on the face of it achievable.

You have as much chance of doubling your money every year for three years as hitting a jackpot at Vegas.

To the nearest percentage there is no chance of earning gains like 100% a year from shares and if someone does, they have been very lucky and are not responsible for their good luck. Anyone reading this who has achieved such gains should close their positions now, pile their money up on a table and count it out before putting it back into the market. It will be a good opportunity to kiss their money goodbye. Luck or one way markets that provide such profits do not last.

Value investing is a technique that when combined with the simple basics of investment provides a basis for building up wealth, with a lot less anxiety than the other investment strategies out there.

Its sixty year history is alone a strong recommendation that value investing works and will keep on working.

Other ideas have come and gone, yet value investing keeps on going.

One of the reasons for this longevity is that value investing requires discipline and some work. It is rather boring and unflashy.

This is a benefit but for many it is a drawback. People are drawn to risky games and the stock market is considered risky and they like excitement and kudos. These punters want to make quick money because they have a gambling streak.

Value investing does not satisfy the gambling urge very much as it is quite drab, rather unexciting and takes regular maintenance. Gamblers want minimal work and plenty of sensation.

Value investing is like gardening, just the sort of thing that gamblers arent interested in.

Consequentially value investing is never in fashion. However, because it makes money, it is never out of fashion either.

Most investors know they should be value orientated but few can resist the enticing whirligig of trading and the glamour of go-go shares.

This is understandable.

People simply cant resist the lure of the casino either.

Why else would people pour their money away on simple games like roulette, when they have worked so very hard earning the money in the first place? It is because people love noise, thrills and flashing lights. They get hypnotised by them. Many shares in the stock market are like casino games and the city has learnt long ago that most of their potential customers dont want sensible profits; they want the lure of riches and a gambling high.

Sadly greedy gambling kills in the stock market or at least costs the player a bundle.

Meanwhile, diligence pays.

This is why value investing works. The market has to pay investors a good return to own boring out-of-fashion shares. Prices of unloved companies fall until they are so cheap that smart investors cant resist buying them. At some point this unpopularity goes into reverse and those that bought in cheaply make good returns.

If I turn that idea around you will quickly see why so many investors lose money.

The reverse situation is that people buy fashionable stocks that everyone loves. Clearly at some point the price of the share rises so high that people cant resist taking their profits. At this point everyone who can buy has already bought and therefore the share price must fall. When the companys share price falls it suddenly becomes less popular as holders start to lose money. Losses are made by everyone. As the price falls so the company gets more unpopular until no one wants to own it. After several rounds of this the share becomes ignored and cheap.

Enter the value investor.

The fundamental principle of value investing is the simplest: buy low, sell high. I like to say buy cheap and sell not cheap.

The rest of this book is about how to do just that. Value investing is not a great deal of fun, it is not very exciting, but it will make you money. You can spend the profits later on fun exciting things.