How to Learn Value Investing in a Simple Way?

Recently Parth asked, “How to learn value investing in a simple way?”

With his permission, I’m sharing this with all fellow value investors.

Hello Sir,

I am new to investing, in a learning phase, most unfortunate to be in science field. But I am trying to learn the fundamental theme of the value investing. Net profits, EPS, PE, book value, debt equity ratio.

Now what baffles me are the concepts of DCF, FCF, Margin of safety and Intrinsic value.. I have been googling this since months but not able to find something which is easy to understand. Please throw some light on these subjects. And also suggest some books through which I can get it in layman terms.

Thanks in advance.

Regards,

Parth Dalal

My response:

Hi Parth,

Since you insist that the resources be simple, I’ll keep the reply simple too. At least, I’ll try. 🙂

Q1. Which is the simplest starting point for all investing?

Basic accounting, without a doubt. You rightly hint at its role, in your mail.

Start with the NCERT textbook series for classes XI and XII. You can begin with this chapter in this simple series of books on accounting

Q2. Which is the simplest resource for linking accounting with investing?

The best resource for a strong understanding of the process is either of these two:

  1. Prof. Dan Gode’s framework of accounting, finance and valuation
  2. Prof. Stephen Penman’s framework of accounting, finance and valuation

Are they simple? I find them to be!

But you may not necessarily feel the same, if you’re just starting out. Not a big fan of what’s available on the internet though. So here’s my attempt to make simple some of these concepts and apply to Indian stocks:

  1. How to read a Balance Sheet.

Q3. Which is the simplest resource for value investing?

The best books for value investing are without a doubt by Benjamin Graham, Warren Buffett, Charlie Munger and Stephen Penman.

  1. Here’s a list of perhaps the best books on value investing

Here’s my attempt to make simple some of these concepts:

  1. How to Calculate Intrinsic Value for an Indian Stock?
  2. How to Calculate Margin of Safety for an Indian Stock?
  3. And finally to put them all together: 7 Steps of Value Investing: How To Pick Stocks For Your Portfolio

Five second summary: Check out the links marked as make simple. 🙂

Hope this helps.

Happy Value Investing!
Satyajeet

Flickr Creative Commons Image via Dmitry Baranovskiy

14 thoughts on “How to Learn Value Investing in a Simple Way?”

  1. Hi Parth,

    It is a common problem faced by most people who are at the beginning stage..having said that it doesn’t mean that I have become an expert or anything..

    If Satyajeet allows, then I would like to share with you a few things that I got to know over the last 4-5 years about the beginner’s dilemma.

    Some 4-5 years ago a value investor from abroad told me that if you are just starting out, then you read everything you can about Warren Buffett and Joel Greenblatt.

    Well, i didn’t follow that advice as it is, but I think it is a very good advice for any beginner..

    In fact, Joel Greenblatt who has authored two books on value investing and who teaches at the Columbia University, said in one of his interviews that if you are just starting out then it is better to read Intelligent Investor and Essays of Warren Buffet for the first year or so..first try to get a good handle on the concepts.

    And, that is what it is..try to understand the concept of the value investing rather than getting entangled in the formulas and terms like FCF, intrinsic value etc..as you would learn more, you’d realise that a formulaic approach doesn’t work.

    Satyajeet has already given you a good resource list comprising.all the relevant books. No doubt, all of them are must read..I would just like to add a few names:

    Interpretation of Financial Statements by Ben Graham
    Little Book That Beats The Market by Joel Greenblatt
    5 Rules to Stock Investing by Pat Dorsey

    Another book that I found to be a good primer on value investing is Getting Started in Value Investing.

    However,, apart from the books, reading annual reports is equally important.

    Internet is also a good resource, but then don’t try to read too many blogs apart from Satyajeet Mishra 🙂

    Patience, persistence and disciplined approach is the key to succeed in value investing and it is the same with readings..

    Thanks,

    Manish

  2. Thank you for the honour, Satyajeet 🙂

    Yes, Prof. Bakshi is a role model for many and my interest in value investing started only after I stumbled upon his blog – fundooprofessor – way back in 2006. It has been a long, uphill, haphazard journey ever since then..his last few lectures have been truly amazing and an eye-opner for me at least, especially the Killer Puzzle and the Relaxo Lecture.

    I just tried to put together a list to help somebody overcoming with terms like FCF, margin of safety, intrinsic value etc…

    In fact, your last few posts are also superb.

    Keep up the good work.

    Thanks,

    Mansh

  3. Manish,

    Thanks a lot. I am looking forward to those books. Yes, even I have read prof bakshi’s work and so far I have not come across use of any such formula or any method. likewise, with what I have read about Buffet and Munger, what they insist and do is give more importance to intrinsic value and margin of safety.. And so i had added these 2 phrases too in my list.. as far as what i have understood, this all is about predicting and assuming future growth of the company which will lead to intrinsic value.. Now, for this, one needs to know the nitty gritties of the business.. but for a small retail and non finance guy like me, it is not possible to know all the modes of business.. Thus, it becomes difficult or rather confusing..

    Moreover, a big thanks to Satyajeet who indeed answered the query.. Other big bloggers or investors feel its too lame to answer such queries.. they are busy answering to the questions with all technical jargon..

  4. Dinesh Dhiman

    I have been thinking a lot about starting with investment. Every time i make up my mind, the market crashes significantly. I came across your blog and find the advice pretty useful. I feel learning more about legendary investors like Buffett and even Jhunjhunwala is quite helpful.

  5. Hello Sir,

    These links doesn’t work. Can you please fix them?

    1. How to Calculate Intrinsic Value for an Indian Stock?
    2. How to Calculate Margin of Safety for an Indian Stock?
    3. And finally to put them all together: 7 Steps of Value Investing: How To Pick Stocks For Your Portfolio

  6. Hi Satyajeet,

    Looks like I’ve missed a lot of information by joining late 🙁

    While I’m trying to catch up with your addictive articles, I’m unable to open the following links:

    How to Calculate Intrinsic Value for an Indian Stock?
    How to Calculate Margin of Safety for an Indian Stock?
    And finally to put them all together: 7 Steps of Value Investing: How To Pick Stocks For Your Portfolio

    Could you re-post if they have been deleted as I’m pretty eager to go through the version customised for Indian markets.

    Thanks in advance and keep going strong. I just have one complaint though, I can foresee that your blog is going to make me sit pretty late in the night 🙂

  7. Hi Satyajeet,

    First of all thanks for your prompt action to revive the link. I’d gone through the information & really appreciate the way you’d try to put it (lucid for a guy like me from non-accounting background).

    In fact, I feel lucky to have come across this article much later than it’s written. The reason being a chance to compare the analysis with reality.

    In the analysis titled “How to Calculate Intrinsic Value for an Indian Stock”, you’ve equated ‘Hawkins’ to ‘Virat Kohli’, the future prospect in Indian stock market as in Indian cricket. But look at the stock of ‘Hawkins Cookers’ typically since Feb’15 (4 months’ time), falling from 4600 levels to 2200 levels without any signs of recovery. It’s typically on a free-fall & eroding capital of some investors who would have done their homework before investing in that company 🙁

    I would be really interested if you could take this as a case study & identify the root cause of this aberration. If you are able to nail this case, then it would help us in understanding the Indian markets better (I guess so as our markets have strong sentiments like Bollywood movies and could react unpredictably at times 🙂 )

  8. Dear Sir,

    Thnx for the insightful articles,appreciate the hard work u put to create n share all vital info.with us.

    Sir i hv a 2 part query:
    a)can a person with less money and resources practice value investing like ‘smart money’ ?
    b)can serious financial freedom achieved via value investing route ?

    Pl. Guide.

    Rgds
    Amit

    1. Hi Amit,

      There is really no need to imitate ‘smart’ money. In fact, one of the great advantages of being a small, retail investor is your freedom. Freedom in picking the stocks you want, when you want, for as long as you want. Most ‘smart’ i.e. ‘institutional’ investors do not have that much freedom.

      Yes, value investing can help you achieve serious financial freedom. But it is wise to combine investing with other activities. Get skilled at a job, profession, or a business. And then, use your surplus savings in value investing.

      In fact, there are great benefits to having other skills – for example being a good businessman. You understand what makes a business tick, at a deep, visceral level. It helps your understanding of investments.

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