How to Compound Your Wealth Through Value Investing

Sitting on a net worth of just over 100 billion dollars, Warren Buffet is the seventh wealthiest man on the planet as of April 2021. If you were to ask him the single greatest contributor to his immense wealth, Mr Buffet would undoubtedly refer to his teacher and mentor, Benjamin Graham.

The late Benjamin Graham was a British-born American economist, investor, and professor referred to as the “father of investing.”

Benjamin Graham developed an investing philosophy that taught investors to ignore the often-irrational group think that permeates the stock market. 

Warren Buffet teaches and uses the same principles to build his financial empire, who is famously quoted as saying, “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.” 

Value investing is all about minimizing risk by finding value in the shares of well managed companies performing well in the marketplace and selling at a fair price. 

The most important concept of value investing is to reduce risk by discovering price versus value discrepancies in the market and buying when the price of a stock is below its intrinsic value.

Read on to learn more about the strategies behind value investing and how you can use them to build a solid portfolio of high-performance shares. 

Creating a Margin of Safety

You create a margin of safety by purchasing shares at a significant discount to their intrinsic value. 

What is Intrinsic Value?

Intrinsic value is a philosophical number measuring the value of an asset. It’s an objective calculation using financial formulas to arrive at a value rather than rely on the current market price. 

In simple terms, if you arrive at an intrinsic value of $3.00, and you can buy shares for $1.50, you have created a safety margin on your investment. 

The trick is to arrive at an accurate intrinsic value, which is an investment technique that Warren Buffet and Benjamin Graham mastered. 

This philosophy is the foundation of Warren Buffet’s wealth-building capacity. Once the market re-evaluates itself, and the stock rises to its fair value, the investor is ahead of the market. 

Should the company falter and perform badly, a safety net ensures that the investor does not lose when it’s time to offload the stock. 

Given the level of caution applied to ensuring only quality companies are added to the portfolio, shares purchased using this strategy have historically shown that declines in value are unlikely. 

Profiting Off Market Volatility

A volatile market delivers opportunities for the savvy value investor. When a market is stressed and shareholders are offloading stocks left, and right, these are the times that investors like Warren Buffet thrive. 

When there are more sellers than buyers in a panicked market, the trading value of the share often drops below its intrinsic value. 

Graham used a fictional character called Mr Market to create an apt analogy for the emotional state of the market. 

When Mr Market is depressed about the state of a company, he offers to sell them at a discount price. If he’s optimistic, the asking price is higher. The investor is under no obligation to buy at any stage. 

Form your own estimates about the value of the stock, and only invest when the price makes sense. When Mr Market is feeling depressed and offering shares at a good deal, the smart value investors are swooping in and taking advantage. 

Buying bargain-basement prices shares is not the only way to profit. An optimistic market could be asking prices that are much higher than the intrinsic value. In these situations, it could be profitable to sell the shares at an inflated price. There is always the option to scoop them up again when the market re-evaluates.

Preserving Capital Through Diversifying

Benjamin Graham did not just advise on buying and selling stocks. He also advocated investing in bonds to preserve capital through market fluctuations. 

Should the market experience a downturn, investors could achieve capital growth through bond income.

Graham was concerned with preserving capital first and then making it grow.  Understand What Type of Investor You Are

Graham divided investors into two groups: active and passive. Active investors are an enterprising bunch who put a lot of time and energy into managing their investments. 

In Graham’s investing philosophy, an active investor is not the equivalent of a high-risk investor putting it all on the line for easy money.

Instead, they are investors who are willing to put in the extraordinary amount of time and effort needed to find value. The higher returns are possible because of their commitment to hard work, not because of additional risk. 

Passive investors are more content to put their money into an investment that they don’t have to watch carefully. They most often choose rock-solid investments with little risk and accept that the return could be a little lower. 

How to Find Value

There are several criteria to consider for investors who emulate Warren Buffet and Benjamin Graham’s investing style.

1. Quality Rating

Only invest in companies with a quality rating that is average or better. You can use the S&P Earnings and Dividend rating of B or better to determine quality. 

2. Debt to Current Asset Ratio

Find companies with a total debt to current asset ratio of less than 1..10. 

3. Current Ratio

Current Ratio is current assets divided by current liabilities. A ratio of 1.50 is a common ratio recommended by many investment advisors. 

4. Positive Earnings Per Share Growth

This rule is fairly straightforward; find companies with positive earnings per share growth over the last five years with no earnings deficits. Abiding by this rule will help eliminate high-risk companies. 

5. Price to Earnings Per Share (P/E)

Only consider investing in companies with P/E ratios of 9 or less. Low P/Es removes high growth companies from consideration, which should be evaluated using growth investing techniques. 

6. Price to Book Value (P/BV)

Look for companies with a P/BV of 120 or less. A P/E mentioned above might look good on paper, but it’s not always the full story. Book value provides a more recent snapshot of the current value of a share. 

7. Dividends

You should only consider investing in companies that are paying out dividends. When you are buying undervalued stock, it can take a while for the market to correct. Dividend payments can make the wait a little easier because you earn while you wait for your stock to become overvalued. 

Benjamin Graham and his student Warren Buffet are considered pioneers in the investing world. Using a few sound strategies, they both managed to consistently beat the market and grow their holdings to epic proportions. The good news is, their strategies are not closely held secrets. Anybody willing to learn can use value investing principles to consistently compound their returns.

An easiest way is to take up the Zero to Hero Stock Value Investing Course @www.zerothero.com TODAY !