There are many ways to make money in stock market.
For instance, there are many ways to score runs in cricket. One can follow the approach of Sachin or Sehwag or Gayle. But the end goal of everyone is the same i.e. to score runs and win the match.
Similarly, the end goal of everyone in the stock market is to compound money. To compound money, one should follow the approach which suits his nature and has given successful results in the past.
The approach which suits our nature and has given successful results in the past is Value Investing.
Value investing involves buying stocks which are trading at a discount to its intrinsic value. Finding intrinsic value of a stock is both an art and a science.
Value, like beauty, lies in the eyes of beholder.
Any stock which is being traded has a buyer and a seller. Let’s assume that a share’s last traded price is Rs.80. This means that the buyer believes at Rs.80 the stock has value while the seller believes at Rs.80 the stock does not have value. To be on the right side of the trade, one needs to have a correct understanding of value.
For us, value is not any precise number. It is a range. True value of the stock cannot be a precise number because it is impossible to accurately predict every micro and macro factors that affect the business. After thorough research, what an investor can do is to come up with a range of values depending on best and worst-case scenario. And then the investor should wait for the market to offer a price that is significantly below the lower end of the range which gives him a sufficient margin of safety.
For us, quality and speed of research is everything.
There are times when a stock is undervalued for a short period and we have to make a quick decision whether we should buy it or not. If we have not done research about this stock in advance, we might lose the opportunity.
So, quality and speed of research is the only way to be a great stock picker. As Louis Pasteur has rightly said, “Fortune favors the prepared mind”.