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In this article we will examine what value investors do differently.
The one thing that separates the value investors from the rest of the players in the stock market is their ability to value the business objectively based on the available information. They are more oriented towards the value of the business. The price at which the underlying stock is quoting does not matter much to them except when comparing the value to the price when making a decision about whether or not to buy the stock.
They always have a margin of safety in their investments. Margin of Safety is what protects the value investors when the markets go down or the economy suffers due to macro-economic factors. They build margin of safety into their investments. This helps them to buy the stocks only when they are quoting below the actual value of the business. This ensures that they do not lose much when the tables turn.
They are very frugal (who spend less) by nature. They live below their means and do not make a show of their wealth. Personally, they are calmer and quieter people who amass huge amounts of wealth without the world getting any inkling of it.
Value investors are avid readers. They read a lot. If their investments are in a particular company, they read and know everything about the company so much so that they have more knowledge about the company than its directors themselves. They also read a lot of the trade journals, Industry magazines, product information and everything associated with the investments that they have made.
When they make a mistake, they book the loss and go for the next opportunity. Value investors do make mistakes. When COVID 19 happened, Warren Buffet the famous value investor sold most of his holdings in the Aviation sector. Most ordinary investors sit with their losses expecting the fortunes to turnaround in the companies that they invest in even though the facts are to the contrary. For example, the investors who lost heavily in Anil Ambani group of Reliance companies still hold on to their investments in the hope that those would recover whereas, based on the current circumstances, the chances are highly unlikely. Value investors do not do that. They swallow their pride, book the loss and move on to next best opportunity.
They are willing to wait patiently until the market provides the right price. They understand the importance of waiting patiently more than any other. If the price is not right, they will not commit anything. They make a profit at the time of buying itself as they pay a very low price for their investments. They buy mostly only when the stocks are on Sale such as in March 2020 (Covid Panic driven) when almost the whole market was available on discount.
They are okay to wait in cash and not fully invested if there are no better investment options available.
They generally do not sell their investments. If the business of the company is growing, their earnings are increasing year after year, then they would not sell their investments. They continue holding their investments almost indefinitely. They sell only when the reasons on the basis of which they bought the stock do not exist anymore, when the decline in the sales and profits of the company is permanent or when there is a better alternative available for their investible funds.
They are good with numbers and are able to make a lot of calculations about value and price instantly in their minds.
They are not active in the market. For them, inaction makes more profit than constant buying and selling at every point. They don’t follow the minute to minute price movements of their holdings and are okay even if the stock market is closed for the next two years so long as the business, they invested in does well.
They buy huge quantities of shares at aggressively lower prices (only when the whole market is on Sale) or when the business of the company is grossly undervalued or a temporary bad news which drives down the market price of a wonderful company to lowest levels.