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Lessons For Stock Market Investors From the Little Book of Value Investing

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This weekend with a lot of spare time in my hands, I picked up a great book at our local bookstore, the book titled The Little Book of Value Investing by Christopher H. Browne.

Initially, when I started reading the book, I thought of finishing it over two days as I had a lot of weekend chores to do like shopping for groceries.

But the book was so interesting that I finished reading it in 2 hours. The book is all about value investing, which matches our core philosophy here at R&R. Know more here.

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The author of this book Christopher H. Browne is a well-known value investor and was a partner of a brokerage firm that had legendary investors like Benjamin Graham and Warren Buffet as clients.

So here are a few valuable takeaways from the book, which I think I should share with all you serious investors out there.

Buy Stocks Like You Buy Everything Else When They Are On Sale

Value investing is all about buying stocks trading below their intrinsic value by keeping a margin of safety. Relying on these two principles, an investor should focus on buying companies for significantly less than their actual worth by keeping a margin of safety.

We usually see huge crowds thronging malls and supermarkets whenever there is a sale to grab their favorite merchandise at substantial discount prices. Isn’t it?

Strangely, the same attitude is never seen when there is a sale in the share market due to a stock market correction. Rather than looking at it as an opportunity to buy more, most investors panic or turn cautious.

Patience Matters A Lot In Stock Market Investing

According to Browne, stock investment is a lot like property investment where the intrinsic value of a stock, like property, hardly increases the very next day after you buy it. Instead, an investor should look at the power of compounding to grow one\’s investment portfolio in the long run substantially. Browne also mentions in his book that any investor who does not want to invest for the long term, he should stay away from equity investment in the first place.

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Trying To Forecast The Direction Of Stock Prices Is A Waste Of Time

In the book, the author shares an example of Benjamin Graham, one of the greatest value investors of all time to explain that neither Graham nor Browne himself had faith in their ability or the ability of others to predict the direction of stock prices over the short term.

So, it is pretty evident that if the most successful investors can’t predict the direction of the stock market in the short term, will ordinary investors be successful in doing so?

Now, this is quite obvious because in the short term lot of uncertain events can crop up like the USA-China trade war, the Russia-Ukraine War, Iran-USA tensions, rise in crude prices, high inflation, etc. to name a few globally. At the domestic level, uncertain events like the FPI surcharge post Budget 2019, the FPI sell-off, and rising inflation can have an impact on the stock markets in India.

In the short term, there are many uncertainties affecting the Indian stock market over which investors have no control. The best example of this is the dramatic 800-point fall in Sensex in the aftermath of the killing of a top Iranian military commander in an American drone attack.

In short, Browne advises investors that instead of wasting time trying to forecast the direction of the stock market, they should instead invest in companies with good fundamentals for the long term.

Frequent Buying And Selling Makes No Sense

In the book, the author compares investors who buy and sell stocks frequently to drivers who keep switching lanes on the highway while driving in heavy traffic.

Frequent buying and selling involve various charges and taxes, which can have the opposite effect of compounding. So, rather than buying and selling stocks frequently, Browne advises investors to remain invested in good companies for the long term.

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Always Keep An Eye For Good-quality Mispriced Stocks

Both analysts and investors closely watch the quarterly results of companies. When a stock does not perform as per the expectations of analysts, investors start worrying and sell the stock. This may result in temporary mispricing of stocks, which offer an investment opportunity as the fundamentals are still intact.

Browne feels that patient investors who invest in such mispriced opportunities are duly rewarded handsomely. There are many ways to succeed in stock market investing. One of the best ways to succeed is to do what successful investors have done, i.e. value investment. This is what the book is all about.

We hope you imbibe these lessons and read the book too.


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