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Buffett’s Investing Philosophy

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Have you heard about value investing? If not, have you heard about the famous American investor Warren Edward Buffett? Value investing is the investment philosophy that Buffett adheres to. However, this value investing philosophy is not established by Buffett but his teacher Benjamin Graham.

Intrinsic value of a company is what value investors focus on. According to this value investing philosophy, there is a specific intrinsic value of a company at a specific moment of time. This intrinsic is highly affected by the company’s own competitiveness. That implies the higher the competitiveness, the higher is the intrinsic value. You may also get an approximate intrinsic value from the stock price. If the market price of the stock is lower than the stock price less your margin of safety, the investment is worth holding.

Looking at the people around you and you may notice that many people buy the stock when its price is low. For a value investor, he or she may not be attracted by the low stock price alone. As mentioned, they focus on the competitiveness, growth, past history and present and future performance of a company instead of the fluctuating stock price.

Analysis is one of the key elements for a successful investor. Stock price fluctuates according to supply and demand and sometimes speculation. But, in the long run, the stock price of a company is largely dependent on its own competitiveness, potential and intrinsic value. To a value investor, the real intrinsic value of a company is much more useful than the stock price. Therefore, their decisions are less likely to be affected by the short term fluctuation of stock price.

Value investing focuses on a steady and prolonged growth. A small increase every year contributes to a significant increase in 20 or 30 years. You may have noticed that in order to have a significant increase in 20 years, you have to hold the investment for 20 years. Value investors agree that there are numerous external factors that can affect the stock price. But, they believe that the whole financial market is in an upward trend in the long run. Therefore, they emphasize on holding of investment instead of short term buy and sell.

Many people love to take advices from technical analyses on newspaper, magazine and TV. As not many analysts use the value investing philosophy, taking their advices means walking away from value investing. Instead, you may analyze your investment with the simplest model like SWOT analysis. SWOT analysis focuses on strength, weakness, opportunity and threat of a company, which are the important attributes of the intrinsic value. This provides you with a detailed evaluation of the company’s competitiveness and intrinsic value.

Learn more about currency investment: trading system forex

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