Collection: Li Lu - #34 '3 Basic Concepts of Value Investing'


LI LU 00:00

Today, I want to talk a little bit about the value investing.

The basic concept of a value investing obviously is, many many decades old, but today I think it is as relevant as when it was first laid out by Benjamin Graham at Colombia, 6-7 decades ago. There's essentially just three basic ideas.

The first one is the stock is not a piece of a paper that you trade, but it represent a fraction of ownership of a company. And therefore, valuing the stock ought to really have a basic variance of valuing the company as a whole.

And secondly, that evaluating any financial asset that you have to really predict the future, discounted cash flow the future cash earnings and the future is inherently difficult to predict.

And therefore, you really want to leave yourself a margin of safety. So that you could be wrong or you could be right, but because of future is a distribution of opportunity. I mean with statistic possibilities, say, you'll bet on something that at 90% of the chances you could be right. But the 10% chance occurred. So all of a sudden become 100%.

So you want to leave enough margin of safety, in other words, you want to buy it at low enough of a price. Even if all the adverse events occurred against you in the future, you will still be in the game.

It doesn't mean you won't lose money, but it just means that you would not lose so much that you'll be out of the game because investing is really a long game, it can place over the life of anybody's career. And so you want to be really in the game somehow over the long haul.

And the third concept is Mr.Market to figure out a frame of mind to think that when the market is against you, you look at it and see neurotic – Mr.Market prone for emotional and irrational behaviors.

So those are the three basic concept.



[YAPSS Takeaway]

  1. Stock is not a piece of paper, it is a business. So you got to value the business as a whole every time you do your research.

  2. Part of value investing is predicting the future of the business because we are predicting there is a chance of us being wrong and hence, a margin of safety is required as a cushion.

  3. Mr.Market is emotional and behave irrationality. The market is there to serve you, not to instruct you.