Value Investing - My Investment Philosophy

What actually triggered my passion for investing was a seminar held in my school about Cash Flows. It was basically a free seminar about managing one's personal cash flows to become rich, its contents based on Robert Kiyosaki's Rich Dad, Poor Dad and his CASHFLOW board game.

That seminar eventually drove me to buy Kiyosaki's Rich Dad's Guide to Investing and I read through it as I went through school. Since I was a Management major, I eventually went through topics such as Accounting & Finance, Operations Management, and Marketing. These classes cultivated my knowledge and further fueled my drive for investing, especially in the stock market.

However, Kiyosaki's book wasn't exactly practical. All it tried to do was cultivate one's business mentality, and it required a lot of effort to take from it what was useful. In the end, I started seeking out finance-based classes that taught me how to analyze financial statements of a bank and a corporation, and how to approach swap options and derivatives. And ultimately, I was led to a class taught by THREE teachers following Warren Buffett's Value Investing principle... and that's where it started.

We only had one semester, and we never covered G&D's Security Analysis as is done in Columbia Business School. However, there I learned that analysts have the power to dismantle income statements as they wished and perform valuation methods I have never seen before in my previous Finance classes. As I was armed with methods such as DCF (dividends), NAV, net-net, Residual Income, Terminal PE, and Earnings Multiple (two handouts I had contained this), I developed a budding interest to read what started it all: Graham and Dodd's Security Analysis.

I got my hands on the 1934 and 6th edition of that book, as well as the 4th edition of The Intelligent Investor. I had the latter two printed for a mere thousand pesos, a fraction of what both books would've originally cost me. Best of all, since the 6th edition had 10 chapters PLUS the appendix cut out from it, the 1934 edition actually provided me with the missing content. ^^



When I went into the world of investing the first time, I had unknowingly adopted the "Value Investing" principle. Now that I've gone through that class and read (and am still reading) G&D's book, I'm glad to say that I have fully adopted the principle of Value Investing.

Value Investing is, according to the 6th edition's preface, purchasing assets/securities for less than they are worth, the discount providing a margin of safety - room for analytical error, the uncertainty of the future, etc. It isn't a mere tool to find bargains, but a COMPREHENSIVE INVESTMENT PHILOSOPHY emphasizing

• In-depth fundamental analysis;
• Pursuit of long-term goals;
• Minimization of risk; and,
  
• Resistance to crowd psychology

VI needs skepticism and judgment, because financial statements can't capture all things affecting value, exactness of valuation can never be accomplished due to the many variables affecting a business and the personality of the analyst, as well as the "uncertainty of the future".

To be a successful Value Investor, one must thus have exceptional research and valuation skills, the ability to perform proper sensitivity analysis, along with patience and discipline. These things one can only get through experience - both analytical and practical.

What are the pros and cons of value investing? Well, for one, there are too many gamblers out there, too many people who view the stock market as risky (my grandfather, for instance). Many people wish to earn on the short-term; others overdiversify their portfolio. Human nature always ensures bubbles, and there are a plethora of investment vehicles VI's can exploit. Sometimes, the companies with value are too small in market cap for a well-managed portfolio!

The only disadvantage to Value Investing, from what I see, is that it takes so much effort to determine a mere proxy of the company's worth based on assumptions, guesstimates that even Graham reluctantly admits we should take. Furthermore, a company's "Intrinsic Value" changes over time as time passes, and sometimes it takes years, or decades, before the market "re-evaluates" its outlook on a certain stock.

For me, however, there are only SEVEN THINGS I look at, currently:

1. CAN PAY DEBT (this is number one)
   
2. PROFITABLE RESULTS (gauging profitability of the business based on income statement and cash flows)
   
3. EFFICIENT OPERATIONS (KPIs, Financial Indicators)
   
4. ADEQUATE RETURNS (DuPont analysis: provides me with an overall look at the company)
   
5. STABLE BUSINESS (quantitative observations + character of the business/industry)
   
6. PROMISING FUTURE
   
7. ALLURING VALUATIONS