A Guide to Value Investing for Traders – Introduction
In many of my previous articles, I have asked traders to set part of their accounts to long-term investments. In short, I have asked traders to have two sets of accounts; one for trading and the other for investment. In the first account, the trader should spend time coming up with short term trades and benefitting from short-term swings. In the latter, the trader should create a portfolio and monitor it periodically. In this article, I will focus on the long-term investment account.
There are many ways of investing for the long-term. First, you can use arbitrage investing where you invest in similar assets and benefit from the spread. An investor who has benefited from this strategy is Ray Dalio who runs Bridgewater Associates, the biggest hedge fund in the world. The second way you can do it is special events where you wait for events like mergers and acquisitions to happen. The third way is value investing which has been advocated for years by people like Warren Buffet. As you know, Warren Buffet likes buying companies and holding them for decades. How then do you become an incredible value investor?
First, you should identify companies to invest in. As you already know, there are tens of thousands of companies that are public around the world. These companies are in different industries like technology, industrial, and utilities. You should first identify the industry you are interested in investing in. You can decide to focus on one industry or a combination of several. Ideally, I suggest investing in companies that are in different industries. This is because doing so protects you as it protects you from putting all your eggs in one basket.
Second, you should conduct in-depth research. Research is important because it helps you identify companies that are undervalued. Valuation is important. This is because you don’t want to buy a company that is already overvalued. For example, when you go to a market, you expect to pay an item at the lowest price. You should never buy something that you believe is very overvalued. This research should involve looking at the company’s valuation, its business, and its management team. You should also sit back and look at the future. Here, you should look at the next ten years and ask yourself whether the company and its products will still be relevant.
For example, 20 years ago, a company like AT&T was one of the largest company in the United States because of its wireline technology. Homes and offices relied fully on wired telephony services. However, today, most people have mobile phones, the industry has changed, and companies like Apple have become bigger than AT&T.
Today, you can look at it in terms of electric vehicles and crude oil. Tesla became the first large company to come up with electric cars. It is in the process of releasing electric vehicles for the mass market. It is therefore evident that in the next ten years, electric cars will replace the oil-powered ones. In fact, some countries have started to phase out gasoline powered cars. Therefore, if you are investing for the long-term, you should look at companies that are pioneering the new phase of electric vehicles. The same analysis is true even in other fields like beverages. In the past, people loved Coca-Cola. Today, most people in the U.S are trying to avoid Coca-Cola because of its impacts on health.
To be a long-term investor, you must be visionary. You must be look forward and imagine how the world is changing. Look at the millennials and the young people and see their behaviors. Look at how fast they are changing and the interests that they have. Then, invest in these companies and the trends that will change the future.