This week I’m talking with Vitaliy Kastanelson, money manager, writer at contrarian edge and host of the investment podcast investor.fm. I’ve come across Vitaliy on the Real Vision YouTube Chanel, and the InvestED podcast and I’m asking the question today – “What is value investing?”
The value investing framework is very useful in determining some rules you could follow to help inform your buying decisions.
So What Is Value Investing?
Simply put, it’s an investment strategy that involves picking shares that appear to be trading for less than their intrinsic or book value. Value investors don’t believe in the efficient market hypothesis, that the share price takes into account all known information – they believe the market overreacts to good and bad news. This over-reaction brought on by investor sentiment means that every now and then, you can pick up shares for below their intrinsic value.
If you want to know a bit more on value investing principles by the way, check out ‘investing with tom’ on Youtube – I’ll pop a link to this guys channel in the show notes – I highly recommend Toms videos as he’s a Kiwi, and he’s got a really good approach to breaking down this concept well.
So, good news for the everyday investor – You don’t have to be a brilliant analyst or be super smart to be a Value investor, but it’s best if you follow a few simple rules they all seem to live by, specifically::
- Practice patience. This means – don’t be afraid of doing research on a company then saying no
- Don’t follow the herd, and don’t be afraid to be contrarian. In today’s episode we discuss why Vitaliy purchased Uber but not Tesla recently.
- Don’t just buy the market – value investors will generally only invest in a handful of companies that they know well – if they are successful in this effort, they aim to get a return that’s above the market.
- Try to understand the business and think like a business owner, not just as an investor. This isn’t a game you’re trying to win, this is about partnering with successful pre-existing businesses.
- Buy with a margin of safety. The idea here is you purchase when the share price is at a set level, say 50-70% of what the intrinsic value is for the shares. This margin of safety can cover a multitude of sins (poor research, external events, negative investor sentiment etc).
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