Why Invest In Stocks?Jun Hao
Before we delve into the world of value investing, it is vital to gain an understanding of why people should even bother to invest their hard earned money in stocks. There are other options of where you can invest your money, such as bonds and gold, so why should stocks even be considered?
Source: Credit Suisse
The answer is simple – stocks have shown time and time again to deliver higher returns over the long run than other asset classes.
Thinking of stocks as a part-ownership of business
Viewing stocks as a part ownership of a business is in our view the right way to think about stocks. When you own the stock of a company, you become co-owner of that business and share in the profits with other shareholders. Therefore, the more money the company makes, the more money you make.
When you think of stocks this way, you can see that to analyze the attractiveness of a stock, you should be thinking about the actual underlying fundamentals of the business and not the price of the stock. This is referred to as fundamental analysis.
This differs greatly to technical analysis whereby people try to predict the future of stock price movements based on historical price charts.
Exploiting Market Psychology
“Market prices are set my herds of emotional, greedy, or depressed persons who do not always act rationally.” – Warren Buffett
Value investors use this short term irrationality to their advantage by buying great companies at a discount. Buffett illustrates this by saying, “Whether we are talking about socks or stocks, I like buying quality merchandise when it is marked down.”
Value investing is essentially an investment idea that involves buying securities that appear underpriced by some form of fundamental analysis.
Perhaps the most well known of all value investors is the a Warren Buffett.
So how has this strategy paid off for him and investors in Berkshire Hathaway?
Source: Business Insider
Article by The Asia Report