Value Investing is an investing strategy and method that was
taught and inspired by Benjamin Graham. Benjamin Graham is the author of “The Intelligent Investor” and
considered as the father of value investing. The basic concept of value
investing is pretty straight forward and pretty simple to be comprehended. The
stock market is a place where many listed companies are available to be
purchased or sold. Companies’ stock prices changes every day and it’s very liquid
meaning that you are able to sell or buy the stock at any given time (during
opening market). The strategy of value investing is to invest in stocks where
the companies’ fundamental are trading in the stock market less than their
intrinsic value. It’s similar like buying a Television set on sale, and knowing
the price of the TV is supposedly worth more than its usual price. You’ll
probably wait before purchasing because you know that there will always be
times when the item is on sales. When the time comes, you’ll buy that certain
merchandise at a discount getting a great value for your money. Many great
value investors have made fortune in investing using this technique. Warren Buffett, Peter Lynch, David Dodd, Charlie Munger, Joel Greenblatt, David
Einhorn and many more are some examples of successful value investors.
I myself
have been using this strategy in investing in the stock market and made pretty
good return since I initiated this blog. Looking at companies’ financial metrics gives me the
advantage of purchasing a stock that is on discount. However, there is a
challenge when investing using this value investment strategy. It’s not as
simple as you would think to be and this is where the term value trap comes in.
Value trap is a stock that appears
to be cheap having low valuation
financial metrics such as multiple of earnings, cash flow or book value for
an extended time period. Such stocks of course attract many value investors
such as myself thinking that the stock is trading at a bargain price. The trap
happened when investors purchase the stock at a low price thinking they are
getting a bargain but the stock continues
to weaken and drop further. Its price appears to be a bargain but in fact
the stock is not selling below its intrinsic value. This of course results for
the investors that purchase that particular stock to lose money on their
investment. I myself experienced value trap when investing in the stock market.
It result me losing approximately $40,000 on that stock (Ticker: GME).
After going through this horrible mistake, it made me become more experience in
investing in the stock market and be more cautious when investing. So how do we spot a stock that is a
potential value trap? In this article, I will explain my experience and
knowledge to know whether a stock is value trap.
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Thursday, August 29, 2019
Wednesday, August 28, 2019
Why Reinvesting Dividends is a Smart Investing Strategy
Becoming a Dividend
Growth Investor is not a quick way to get rich. It requires you to have a strict
discipline to hold those dividends paying stocks for a long term period. The
longer the investment horizon you have, the better the result your portfolio
will have in the future. Historically, the total return of the S&P 500 has
delivered just over 9% per year. Half of the total return comes from price
appreciation while the other half comes
from dividends. This proves that dividends are driving force to S&P 500
total return performance. Readers that have been following my blog know the
benefit of owning dividend stocks. As a Dividend
Growth Investor, you will receive dividend payment that will be paid every
quarter for the stocks you own. Whether you are looking for a source of income
for now or building your portfolio for the future, owning dividends stocks can
be beneficial towards your long term investing. With dividends coming in, you
will have the choice to either use the dividends received for your expenses;
put a down payment on your property, or you can just store the extra cash in
your brokerage account. However, one crucial part of becoming a successful
dividend growth investor is to use the dividends received from your
portfolio to be reinvested in stocks that pay dividends. This might seem to
have very little impact to your portfolio of having the dividends reinvested in
the beginning, but over a long period of time, the
power of compound interest can multiply your dividend growth portfolio at
an exponential growth. Dividend reinvestment is one of the simplest ways to
grow your portfolio. When you reinvest your dividends, you get a massive
advantage compared to not reinvesting your dividends. Since my goal to
financial freedom is still far ahead, I am currently not using the dividends I
receive from my
portfolio for my daily expenses. In fact, I personally am reinvesting the
dividends I receive from my portfolio
in order to have better financial result. When my dividend growth portfolio
produces significant amount of passive income
(dividends) in the future, then I will start using the dividend earnings
for my early retirement. In this
article, I will explain why reinvesting your dividends is a smart investing
strategy for your portfolio.
Tuesday, August 20, 2019
The Definition of Circle of Competence in the Investing World
Circle of Competence
is a term used by many value investors. Warren
Buffet, a successful investor wrote in his 1996 letter to Berkshire
Hathaway shareholders that you don’t have to be an expert on every company, or
even many. You are only required to understand few companies that are within
your circle of competence. Just investing in companies you understand and feel
comfortable with can create great wealth for you in the stock market or any
other investment. What I mean by that, it’s better to invest in companies that
you have understanding in rather than gambling your way to invest in companies
that you don’t understand. This does not only apply in investing in stocks but
also other investment such as real estate, and other assets. If you don’t
understand how the businesses operate in a company or the investment, it’s
better to stay away from it since you might actually lose money when investing
in them. Understanding your circle of competence in investing helps you avoid
making investing mistakes, it helps identify opportunities that you have
understanding and confidence in. So
before you start investing in a stock, it is the best you really understand the
companies you are going to invest in. In
this article, I’m going to explain what circle of competence mean and how you
can apply this term to be a better value investor.
Saturday, August 3, 2019
How to Have Alternative Incomes
If you want to be
wealthy, you can’t just depend on your job. Your primary job only gives a fixed
income every month for the hours you put into. Sometimes your primary job
income barely covers your living cost, which results in you not to have spare
cash to be saved or invested. This becomes a problem if you want to achieve
financial freedom and early retirement. You can live frugally; however, it’s
still going to be challenging to get out of the
rat race if you only
rely on your job since it is the only source of your income. Moreover, if you
get unlucky and get fired by your boss, you will not get any more income. This
then can be a problem for you. You will not be able to pay for your living
expenses such as your bills, taxes, or even the debt you inquire. You might
have to downgrade your living lifestyle by selling things or property you own,
such as car, house, or things that may have some resale value. Many of you and
I don’t want to be in that situation. It’s terrifying and horrific when you
have to end up in that situation. Since we do not want to be in that situation,
I did many types of research for me to have alternative incomes coming in. I
have learned that wealthy people don’t rely on just one income; they have
multiple sources of income. Having multiple sources of income enables you to
have different sources of income, filling your pocket. Alternative income can
come in the form of rental money from properties, interest and dividends,
part-time jobs, side hustles, and businesses. To have alternative income enable
you to pay your living expenses or extra money to invest.
As part of my journey to early retirement and financial freedom,
I learned that I couldn’t just depend on my main job. I worked for my dad, who
owns a manufacturing company; however, I have been getting the same monthly
income since I started working for him in the year of 2013. Also, the salary I
received is in Rupiah (Indonesian Currency), and it is considered low compared
to people who work in America. Even by having me to live a frugal life is not
enough if I want to retire early and live comfortably. Furthermore, I won’t
have income coming in if I decided to quit the main job. This is the reason why
having alternative income streams is crucial in order for me to have early
retirement and financial freedom. With alternative income coming in my pocket, I
would be able to pay my bills, to be reinvested again and again until I have
enough assets that can sustain my living lifestyle. So what are ways for us to have multiple streams of incomes?
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