Understand "deep" value investing

8 Mar 2023

We know these key words: capital preservation, margin of safety, unpredictability, growth, reverse thinking, corporate governance, conservatism, barriers, long-term holdings, consumer stocks, etc. But how do we incorporate all of the above into investment strategy?

In-depth value investment is to allocate investment portfolios on the basis of rigorous fundamental review and sufficient safety margin.

The first is to be strict in stock selection, and try to meet the requirements of "high, broad, simple, small, new, and sharp":

1. Wide: The product has a wide range of uses.

Although it may be a product of a small company, only such a company can maintain long-term growth if it meets the needs of people's living consumption. Therefore, we should deeply select the No. 1 or only enterprise from major consumption such as food, clothing, medicine, and daily necessities.

2. Simple: The product is single and simple, easy for ordinary investors to understand.

Simple products can enable companies to focus more on their operations. Simple necessities are far easier to grow than complex and changeable products with high technological content. Companies that produce simple products are easier for ordinary investors to understand and analyze.

3. Small: companies with small market capitalization and “small” products.

The probability of a small product growing up is far greater than that of a large product becoming bigger. Small products have a big future.

4 New: constant pursuit of innovation.

Including management innovation, continuous improvement of technology, improvement of product added value and innovation of marketing model, in order to make the product closer to the broad market, and thus the enterprise can grow continuously.

1. Steady

Year-round stable performance and dividends should be investigated for as long as possible, such as stable performance and uninterrupted dividends for more than 8-10 years, and a stable and relatively high proportion of dividends.

It is best for companies to have incentives or dividend promises. Dividends and annual performance should be in a slow upward path or slightly fluctuating state. Try not to look for industry companies whose performance jumps up and down.

2. High

There must be a higher dividend rate requirement, roughly around 7%. There may be a dividend rate of more than 5% but the performance growth is clear. Because companies with large market capitalization are basically more mature companies with limited growth space, we need to compensate with higher dividend rates.

3. Low

Lower price-to-earnings and price-to-book ratios. From the perspective of historical trends, the general price-to-book ratio is less than 1 times, and the price-earnings ratio is roughly below 10 times.

The above is the depth of the fundamentals of the enterprise. In addition, we should pay attention to the following points:

1. Don’t set a selling target price too early for a good target

Being able to select good companies that don't need to be sold is an important purpose of striving for stock selection. If you set the selling price at the beginning of buying, it must not be the best target.

The main reason for everyone to hold shares in fear is that they are not fully sure about the future operation of the company, that is, the qualitative analysis of the company is not in place. From this point of view, the qualitative analysis of the enterprise is particularly important, and making a top-quality portfolio is the guarantee for you to hold firmly.

The most in-depth learning and upgrading of value investing is the last hurdle, which is a deep understanding of the relationship between the "moat" and the improvement of the company's intrinsic value. This problem cannot be deeply understood, and it is the ultimate crux of the unsatisfactory returns of many value investors.

Many people are entangled in valuation, or entangled in macroeconomics, etc., and have not effectively solved the fundamental problem of corporate value judgment, because only static understanding is not enough, and dynamic value analysis has many misleading paths, so We have to return to the original qualitative analysis.

With qualitative analysis, you don't need to set a selling price for the target, and let it develop freely, "holding shares and keeping interest, waiting for extremes". If the price is really too extreme, you can also reduce it a little, because you don't uncertain

How will the stock price become reasonable in the future. Unless the overall market becomes unreasonably overvalued, it becomes very necessary to carry out systematic liquidation. Therefore, it is best not to set a selling target price too early for a good target.

2. Earn money for business operations

We have to believe that our ability to convert stocks back and forth is far inferior to the ability to manage the best stocks, because of a vague comparison: since the level of investment compound interest is difficult to exceed 20%, then we should admire those whose return on net assets has been greater than 20% for many years High-quality companies often pay generous and sustainable dividends.

Therefore, we should not only do as few frequent transactions and conversions of stocks as possible, but also earnestly hold the best companies. The combination of these companies is the real backing of our career and life. "How to better earn money for business operations?" Conduct research and exploration on this issue, rather than earning market price differences.

So we get the sublimation of the concept: because buying stocks should be handed over to the future, not the moment of buying. Therefore, value is not equal to static valuation, but value should be equal to the development energy value contained in the enterprise.

Because static underestimation may also be a profit trap, for example: a static underestimation of 50% of the target, assuming that there is not much growth. If the 50% underestimation that lasts for 5 to 10 years can be recovered to a reasonable level, how much is the annual compound interest calculated? Will this achieve the satisfactory compound interest income of equity?

From my point of view, this kind of underestimation may be an investment income trap, and companies that lack growth may imply many problems in future development, which have to be guarded against.

Therefore, make good value investments and don’t chase any opportunities, large or small, from mediocre companies. Such opportunities are not as appropriate as choosing top-notch companies at reasonable or even slightly overvalued prices.

If you understand the full meaning of deep value investing, all your actions will naturally switch to the opposite side of the public sentiment, and you will habitually and keenly use the public's mistakes to make money for yourself.

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