FFB-Post 20
Understanding how to value an investment is the cornerstone of successful investing. Why? Because every investor, no matter how wealthy, has limited resources. We don’t have endless capital to throw at every opportunity, so we need to be strategic in how we allocate our funds.
Why Valuation Matters
Imagine you have $100 to invest. If you invest that $100 in a stock that is undervalued, and it increases by 10%, you’ve made a solid return. But if you invest the same $100 in a stock that’s already gone up by 5%, your potential gains are much lower. The difference in your returns highlights the importance of finding investments that are not just good, but undervalued.
The key takeaway here is that your resources are finite, and to maximize your returns, you must target the highest return-generating opportunities.
The Essence of Value Investing
Value investing is about purchasing an investment for less than its true value. By doing so, you capture value right at the point of purchase. Imagine being able to buy something worth $1 for just 50 cents—that’s the essence of value investing. This approach was pioneered by Benjamin Graham and David Dodd at Columbia Business School in the 1920s, and it has stood the test of time.
What’s Next?
In the upcoming posts, I’ll share a few techniques to help you evaluate the true value of investments. It’s important to note that not all methods will apply to every type of business, so you’ll need to be discerning in your approach.
Next up, I’ll dive into the first valuation method, straight from the teachings of Benjamin Graham himself.
Stay tuned!
For Post 21 – Click Here -> Graham’s Net-Net Valuation Method: A Simple Guide