Buy a dollar for fifty cents
Value investing can be summarized in one sentence: Find companies that are worth more than the market thinks — and buy them cheaply. Benjamin Graham — Warren Buffett mentor and father of value investing — described it like this: Invest as if you are buying an entire business, not just a piece of paper.
"The real price of something is never what someone is willing to pay for it today — it is what it is actually worth over time."— Florence Scovel Shinn
Mr. Market
Graham illustrated the market with the figure "Mr. Market" — an imaginary business partner who every day offers to buy or sell his share of the business. Some days Mr. Market is euphoric and wants a lot. Other days he is depressed and will sell cheaply. Your job is to exploit his irrationality.
Mr. Market: Use the market as your servant — not your master. The market price is an offer, not a definitive answer on value.
Margin of safety
The most important concept in value investing is margin of safety. It means buying stocks at a price significantly below calculated value.
Example
You analyze a company and calculate it is worth 100 NOK per share. With a 30% safety margin you only buy if the price is below 70 NOK. The 30 NOK is your buffer against analysis errors.
Competitive advantage — the moat
Buffett uses the term "economic moat" to describe a company competitive advantage. The wider the moat, the harder it is for competitors to take market share.
Brand name
Coca-Cola, Apple and Louis Vuitton can charge higher prices because customers love the brand. Brand names are one of the widest moats that exist.
Network effect
The more people use the product the more valuable it becomes. Facebook, Visa and Oslo Stock Exchange are examples.
Switching costs
It is expensive and difficult to change supplier. SAP, Microsoft Office and bank accounts have high switching costs that lock customers in.
Buffett quote: "It is far better to buy a wonderful company at a fair price than a fair company at a wonderful price."
Value trap: Some stocks are cheap for a reason — the company is in structural decline and will never recover. Always ask: Why is this stock cheap?
"Patience is not passivity — it is the wisdom that right timing is just as important as right choice."— Florence Scovel Shinn