This weekend with a lot of spare time in my hands, I picked up a great book at our local bookstore, the book titled The Little Book of Value Investing by Christopher H. Browne.
Initially, when I started reading the book, I thought of finishing it over two days as I had a lot of weekend chores to do like shopping for groceries.
But the book got me hooked so much that I finished it at one stretch in around 2 hours. The book is all about value investing, which matches our core philosophy here at R&R. Know more here.
Oh, by the way, the author of this book Christopher H. Browne is a well-known value investor and was a partner of a brokerage firm which had legendary investors like Benjamin Graham and Warren Buffet as clients.
So here are few valuable takeaways from the book which I think I should share with all you serious investors out there.
Buy stocks like you buy everything else when they are on sale
Value investing is all about buying stocks trading below their intrinsic value by keeping a margin of safety.
Relying on these two principles, an investor should focus on buying companies for significantly less than their actual worth by keeping a margin of safety.
We usually see huge crowds thronging malls and supermarkets whenever there is a sale to grab their favourite merchandises at substantial discount prices. Isn't it?
Strangely, the same attitude is never seen when there is a sale in the share market due to a stock market correction. Rather than looking at it as an opportunity to buy more, most investors panic or turn cautious.
Patience matters a lot in stock market investing
According to Browne, stock investment is a lot like property investment where the intrinsic value of a stock, like property, hardly increases the very next day after you buy it. Instead, an investor should look at the power of compounding to grow one's investment portfolio in the long run substantially. Browne also mentions in his book that any investor who does not want to invest for the long term, he should stay away from equity investment in the first place.
Trying to forecast the direction of stock prices is a waste of time
In the book, the author gives an example of Benjamin Graham, one of the greatest value investors of all time to explain that neither Graham nor Browne himself had faith in their ability or the ability of others to predict the direction of stock prices over the short term.
So it is quite evident that if the most successful investors are unable to predict the direction of the stock market in the short term, will ordinary investors be successful in doing so?
Now, this is quite obvious because in the short term lot of uncertain events can crop up like USA-China trade war, Iran-USA tensions, rise in crude prices etc. to name a few at a global level.At domestic level too there have been uncertain events which impacted the Indian stock markets like the FPI surcharge post Budget 2019.
In the short term, there are too many uncertainties which affect the Indian stock market over which a stock market investor has no control. The best example of this is the dramatic 800 point fall in Sensex in the aftermath of the killing of a top Iranian military commander in an American drone attack.
So in short, Browne advises investors that instead of wasting time on trying to forecast the direction of the stock market, one should instead invest in companies with good fundamentals for the long term.
Frequent buying and selling makes no sense
In the book, the author compares investors who buy and sell stocks frequently to drivers who keep switching lanes on the highway while driving in heavy traffic.
Frequent buying and selling involve a variety of charges and taxes, which can be considered as having an opposite effect of compounding.
So rather than buying and selling stocks frequently, Browne advises investor to remain invested in good companies for the long term.
Always keep an eye for good quality mispriced stocks
Quarterly results of companies are watched closely by both analysts and investors. Sometimes when a stock does not perform as per the expectations set by analysts, investors start worrying and sell the stock.
This may result in temporarily mispricing of stocks which offers an investment opportunity as the fundamentals are still intact.
Browne feels that patient investors who invest in such mispriced opportunities are duly rewarded handsomely.
There are many ways to succeed in the stock market investing. One of the best ways to succeed is doing what successful investors have done, i.e. value investing. This is what the book is all about.