There are various aspects when it comes to value investing and there is nothing more crucial than having a good understanding of the fundamentals. You need to know that in order do it successfully, there are 3 core elements of value investing: the right business, the right management and the right price.
These 3 elements are considered the very basic foundations to value investing because value investing is about buying assets, be it a business or property, at an undervalued price. As value investors, we need to constantly look at the overall business in the context of its business environment, prospects, business model, processes, competitors, management, business performance and resources.
These 3 little tenets must be considered at all times and with the right business, right management and right price, you are equipped with the essential ingredients to successful value investing.
But how can we identify the right business? Well, this involves knowing the various industries and companies out there, distinguishing stable and volatile industries, and knowing which are cyclical or slow-growing industries? Knowing the best types of business to invest in, as well as the ones to avoid, will help you minimize your risks as an investor.
Choosing the right management is next. By this, we will be referencing the right team or person steering the company’s business. Needless to say, a good company needs a strong and capable management to not only run its operation and business efficiently and effectively, but also the vision, integrity and conviction to steer the business ahead of its field. As such, picking the right management team is crucial.
And even when you have identified the right business and management, you need to ensure that you are paying the right price for a share in the business. But as a buyer, what is considered the right price? Well, the most straightforward answer to that question would be a price that is as low as possible.
Think of yourself as a buyer of a private business. Would you pay for a quality business with good management at low price? Similarly, this principle can be applied when buying stocks.
Should you overpay for a business, albeit a quality business, you may end up getting a lower than expected return on your investment. On the other hand, if you were to purchase a quality business at a bargain price, you will have a better chance of getting a high return. The worst that could possibly happen is overpaying for a poor business. So at all times, always ensure that there is some margin of safety in your investments.
Bearing these 3Rs in mind, you should now have a clearer understanding on what value investing is really about. So why not put the knowledge to good use by taking it a step further to help you multiply your wealth?
Register for our complimentary value investing masterclass now and learn how to start investing in Singapore! Through the power of compounding, you’ll find that the sooner you begin, the better returns you’ll get back!
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