I posted the basic rules for trading sourced from Gartman.
Now i will provide a basic outline for value based investing:
Firstly a bit about MR MARKET:
Mr Market
Benjamin Graham used an imaginary investor called Mr Market to demonstrate his point that a wise investor chooses investments on their fundamental value rather than on the opinions of others or the direction of the markets.
Graham’s parable goes something like this. Think of yourself as owning a share in a business in partners with others. One of your partners, say Mr Market, is somewhat of a neurotic who on any given day will offer to buy your share or sell you his at a specific price. His moods can fluctuate anywhere between incredible optimism and overwhelming depression. One day he will nominate a higher price to buy or sell, the next day he might increase it, lower it, or even appear uninterested in whether he buys or sells.
The point that Graham makes is that Mr Market’s judgment is formed more by mood swings that by rational thought and that this gives the wise investor buying and selling opportunities. If Mr Market’s price is unreasonably high, then wise investors have the opportunity to sell. On the other hand, if it is unreasonably low, then they have the opportunity to buy.
The important thing is that a successful and careful investor makes her or his own decision, based on their own ideas of the worth of the investment.
significance of mr market
Graham does not conclude from Mr Market’s wild behaviour that market fluctuations should be ignored. They can be valuable as an indicator that something is going wrong, or right, with the investment. However, their true significance, in Graham’s words is that "they provide … an opportunity to buy wisely when prices fall sharply and to sell wisely when they advance a great deal".
MARGIN OF SAFETY
The theory of ‘value investing’ was invented by Benjamin Graham as early as 1934 and is based on the assumption that two values are attached to all companies. The first is the market price – the value of the company on the stock exchange. The second is a company’s business value.
All companies have an intrinsic value or business value, which is based on its ‘real time’ value in the event of a merger with a competitor or in a takeover situation. Alternatively the owners may consider the business value as the amount that could be achieved by breaking up the company and selling all its assets.
In the long term, stock prices will reflect this business value, but in the short and medium term, market prices are often far above or below it. Value investing seeks to make the most out of this disparity.
Benjamin Graham tells us that investment policy can be reduced to three simple words: "Margin of Safety" - the price at which a share investment can be bought with minimal permanent downside risk.
The important point here is that the margin of safety price is not the same as the price that an investor calculates a share to be intrinsically worth.
the intrinsic value of a share
An investor may calculate the intrinsic value of a share by differing methods and will eventually come up with a price that he or she believes represents good buying value. Graham had his methods of calculating intrinsic value, Warren Buffett has his, other successful investors have theirs.
Graham acknowledges, however, that calculations may be wrong, or that external events may take place to affect the value of the share. These cannot be predicted. For these reasons, the investor must have a margin of safety, an inbuilt factor that allows for these possibilities.
Even so, something may go wrong. Graham believes however, that, with a diversified portfolio of 20 or more representative share investments, the margin of error approach will, over time, produce satisfactory results.
According to Benjamin Graham:
"[To] have a true investment, there must be a true margin of safety. And a true margin of safety is one that can be demonstrated by figures, by persuasive reasoning, and by reference to a body of actual experience".
A wide margin of safety secures the investments against a permanent loss of capital – even though short-term adverse market movements may occur.
And the above provides the key: security of the investments against a permanent loss of capital, not against short term movements in the price of a share which is outside the investors control.
Now i will provide a basic outline for value based investing:
Firstly a bit about MR MARKET:
Mr Market
Benjamin Graham used an imaginary investor called Mr Market to demonstrate his point that a wise investor chooses investments on their fundamental value rather than on the opinions of others or the direction of the markets.
Graham’s parable goes something like this. Think of yourself as owning a share in a business in partners with others. One of your partners, say Mr Market, is somewhat of a neurotic who on any given day will offer to buy your share or sell you his at a specific price. His moods can fluctuate anywhere between incredible optimism and overwhelming depression. One day he will nominate a higher price to buy or sell, the next day he might increase it, lower it, or even appear uninterested in whether he buys or sells.
The point that Graham makes is that Mr Market’s judgment is formed more by mood swings that by rational thought and that this gives the wise investor buying and selling opportunities. If Mr Market’s price is unreasonably high, then wise investors have the opportunity to sell. On the other hand, if it is unreasonably low, then they have the opportunity to buy.
The important thing is that a successful and careful investor makes her or his own decision, based on their own ideas of the worth of the investment.
significance of mr market
Graham does not conclude from Mr Market’s wild behaviour that market fluctuations should be ignored. They can be valuable as an indicator that something is going wrong, or right, with the investment. However, their true significance, in Graham’s words is that "they provide … an opportunity to buy wisely when prices fall sharply and to sell wisely when they advance a great deal".
MARGIN OF SAFETY
The theory of ‘value investing’ was invented by Benjamin Graham as early as 1934 and is based on the assumption that two values are attached to all companies. The first is the market price – the value of the company on the stock exchange. The second is a company’s business value.
All companies have an intrinsic value or business value, which is based on its ‘real time’ value in the event of a merger with a competitor or in a takeover situation. Alternatively the owners may consider the business value as the amount that could be achieved by breaking up the company and selling all its assets.
In the long term, stock prices will reflect this business value, but in the short and medium term, market prices are often far above or below it. Value investing seeks to make the most out of this disparity.
Benjamin Graham tells us that investment policy can be reduced to three simple words: "Margin of Safety" - the price at which a share investment can be bought with minimal permanent downside risk.
The important point here is that the margin of safety price is not the same as the price that an investor calculates a share to be intrinsically worth.
the intrinsic value of a share
An investor may calculate the intrinsic value of a share by differing methods and will eventually come up with a price that he or she believes represents good buying value. Graham had his methods of calculating intrinsic value, Warren Buffett has his, other successful investors have theirs.
Graham acknowledges, however, that calculations may be wrong, or that external events may take place to affect the value of the share. These cannot be predicted. For these reasons, the investor must have a margin of safety, an inbuilt factor that allows for these possibilities.
Even so, something may go wrong. Graham believes however, that, with a diversified portfolio of 20 or more representative share investments, the margin of error approach will, over time, produce satisfactory results.
According to Benjamin Graham:
"[To] have a true investment, there must be a true margin of safety. And a true margin of safety is one that can be demonstrated by figures, by persuasive reasoning, and by reference to a body of actual experience".
A wide margin of safety secures the investments against a permanent loss of capital – even though short-term adverse market movements may occur.
And the above provides the key: security of the investments against a permanent loss of capital, not against short term movements in the price of a share which is outside the investors control.
