The most important thing in value investing is Buying the Stock with Lower than Intrinsic Value. But as we Know, finding intrinsic value is difficult. Same date may give two different intrinsic value for company if two different analyst study that. So how to make the Profit in that?
The answer is Margin if safety.
Let’s say after analysis, you find out that the intrinsic value of the company is $200/ share and market price is looking 133/ share. So will you accept it as buy? Maybe.
By at the same situation, if the market Price is $190/Share. So will you buy? No.
The reason is Margin of safety. May be$200 is right. But it may be 195 or 205 also. Variation depending upon how your analysis was depending upon any data which you study. You also need to make sufficient Profit from the trade. In fact if you earn say less than 7% then?
In India while I am writing, It is Risk free rate of return AKA Rate on Govt bond. So After keeping that margin you need to keep something more. And that more is nothing but Margin of safety. How much you need to keep that is depending upon you and the data.
Warren Buffett don’t mention it directly. He make this Tenet as the discount available with the investment.
Here I don’t want to divert your attention but want to mention something important.
There are some companies which look like Good opportunity for Value Investing. But they are Not. They are just Value Traps.
You may find them in any Sector which is distress.
Like metal for big part of the world for big time. Banking for some cases. Maybe they are Not the Sector But the company in the Sector. The stock may be in consolidation that is the price is not moving anywhere. Like it is a Price tag on that stock with some big discount like 50% or some thing.
How to find difference in-between value traps and opportunities?
Simple. In value opportunities, the company is growing in Real world. But market is ignoring due to some reasons. Like Management is changing. Low Stake of promoter and that is how someone may overtake. Or the management may be not utilities earning. But that is only thing.
In that the Case, it is God time to Buy. But if the company showing some Poisonous Asset or big liabilities on balance sheet. Then it is Trap.
This is most important to Learn here the concept of value trap and opportunities. I think that is All value investing is all about.
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