| When it comes to investing in the stock market, there | | | | for the taking, or a "buy" situation. |
| is still no better teacher than Benjamin Graham. He | | | | There are however some points that need to be |
| was a British born American investor that lived from | | | | considered; mainly the efficiency of the markets. |
| 1894 to 1979 and was the reason for the success of | | | | Although the theory is considered to be correct, there |
| such investors as Warren Buffet. He wasn't just a | | | | are outside factors that can't be controlled - namely |
| theorist either; he made millions for himself and billions | | | | insider trading and human mistakes in the methods and |
| for his disciples. | | | | interpretation of the data analysed. |
| His reason for successful investing was through value | | | | Another problem with fundamental analysis is that |
| investing. Basically, it means finding shares in | | | | when there is continuous analysis of certain industries |
| companies that are trading below their intrinsic value. | | | | or companies, the prices can be influenced by the |
| This may seam like a deceptively simple formula, but it | | | | decisions of the stockbrokers and investors acting on |
| worked in his day and it still works today. | | | | the results of the analysis. |
| Intrinsic Value of a Share | | | | The Solution to Influenced Prices |
| So, first let me define what the intrinsic value means. | | | | One solution is to look for smaller or medium sized |
| Graham defined this as the value put on a share by | | | | companies that are likely to outperform the market. |
| the facts as opposed to the value set by the irrational | | | | These companies might be flying under the radar as |
| and emotional unpredictable market. The facts are | | | | there will be much less analysis of these companies |
| defined as earnings, assets, dividends, prospects, and | | | | and therefore the price of the shares will not be |
| the management quality of the company. | | | | influenced by the analysts. |
| Obviously, the intrinsic value is not completely stable as | | | | Another opportunity is to find a company in its early |
| it will fluctuate as events affect the company year by | | | | days that looks like it will become a "shooting star." |
| year. On the other hand, the market price is a lot more | | | | Many companies start out because they have |
| volatile as it is determined by such things as trends, the | | | | discovered a new or profitable market niche with little |
| herd mentality of investors, and the overall market | | | | competition. They grow during the creative initial period |
| movements. The secret lies in knowing the difference | | | | and then experience a period of rapid growth and |
| between the more stable intrinsic value and the | | | | acknowledgment in their field. The next phase is the |
| fluctuating share price and acting accordingly. | | | | critical one; when competition emerges the company |
| Value Investing is Based on Fundamental Analysis | | | | will be either doomed to failure as they try to diversify |
| Fundamental analysis is the studying of the economy, | | | | into less profitable areas or they will continue on their |
| the industries, and the individual company to arrive at a | | | | successful drive forward and continue to grow. Finding |
| value of the share price. With this type of analysis it is | | | | these growth driven companies in their early days and |
| possible to find the undervalued shares which are ripe | | | | holding on to the shares is an investors dream. |