Value Investing
When I think of the word “Value” I think of how much something means to me. How much does that something that I value make my life better?
I see value in something that teaches me something
I see value in something that entertains me
I see value in something that broadens my mind
I see value in something that saves me time
I see value in something that makes me money
I see value in something that makes me feel good…
…And on and on.
The problem is a lot of people only understand value in monetary terms. This is a big mistake, especially when you want to sell something to people. People buy benefits, not products. It’s the benefits that have value, not the product. So therefore, most people try to sell products without selling the value it brings to potential customers.
I used to have a boss who thought that a good business transaction was when you totally screwed over the person you were dealing with. This is not good business. I don’t understand this type of thinking. It rarely resulted in repeat business.
People will gladly give you money if they feel that they are getting value for it. You have to pay attention to what problem you are solving for the customer. Are you providing any of the things mentioned above? If you are selling them a product that doesn’t provide them value in the form of making their life better, then you will have a hard time selling them your product. If they do buy it, you will not have a win/win scenario and they will be very unlikely to buy from you again — like my old boss. Always try to provide as much value to the potential customer as you can.
Perceived Value
Then we run into the problem of “perceived value”. This is the difference between how much the customer feels the product is worth and what the product is actually worth. I understand that the market will decide how much anything is worth, but there are some strange perceptions out there that don’t make a lot of sense to me.
For instance - People will take an hour out of their day to go to Starbucks and pay $10 for a caffeinated beverage and a pastry. They will sit there and visit with their friend or scroll through Instagram for the hour and then go back to work. This is a nice experience and we have all done it. However, I doubt it will make much of an impact on the rest of their life.
To contrast this scenario , you could spend $10 on a book that will take you an hour or so to read and it will change your whole life. You will never be the same after reading it and the strategies or ideas could be the catalyst for an amazing transformation in your life.
People don’t even hesitate to indulge in the first scenario but will hum and hah about buying a book full of useful information. They hope that it goes on sale for $5 soon, as $10 seems a little steep for a book.
WHAT THE HECK?
To me the actual value being offered doesn’t even compare in these two situations. Ideas and concepts that I have garnered from the hundreds of books that I have read have brought me to where I am today and who I have become. I would never have achieved the success that I have, without the knowledge and insights I have gained from reading books.
Books written by people smarter than me.
Books by people who have accomplished greatness.
Books that offer new ways to doing things that I would never have thought of myself.
This brings to mind the great quote from Isaac Newton:
“If I have seen further than others, it is by standing upon the shoulders of giants.”
I am always taken aback by the attitudes of people, especially young people, who have atrocious value perception. They can buy a new smartphone — a device that took decades of technological achievements and advances, thousands upon thousands of man hours by hard working extremely smart people — and offhandedly say, “This thing is a piece of s***” as they accidentally drop it in the toilet. Wow.
Nothing exists in a vacuum. Everything you see in our world that is man made was the result of ideas, hard work and execution by pioneering entrepreneurs and visionaries. They sought to bring value to the world and we should try to appreciate, and perhaps, emulate that.
Value Investing
In the context of investing, this same principle applies.
Warren Buffet has been described as a “Value Investor” which means he buys stocks in companies based on their actual working numbers. He only likes companies that have a solid track record of providing value to its customers. He doesn’t run after the “next big thing” or try to “beat the market”. He is always looking to build a solid foundation. He is in it for the long term. It think his strategy is working, as he is one of the richest men in the world.
I adhere to the same principle when buying stocks. In my book, BYOB, I suggest an investment strategy whereby you would choose companies that are truly valuable. This means the criteria is slightly different than what a stock “trader” might use.
I am a huge fan of passive income. Passive income is money that flows into your life whether you do anything or not. It is the holy grail of financial freedom. I love to know that I earned money while I was sleeping or sitting on a beach somewhere. Often, passive income requires a lot of work up front to set up a system, but then is less work later on.
A real estate investor always thinks about buying a home from a numbers point of view. Especially in the commercial real estate world. The actual value of a property is a result of its potential for revenue, not necessarily its “location” or “curb appeal”. People are willing to pay for homes based on all sorts of silly criteria like “its close to schools” or its a short commute, but an investor looks at “will the income from this property cover my expenses and mortgage with some left over?”
So I suggest buying a stock based on “how much income will this stock generate for me?”
This income comes in the form of dividends.
Dividends are distributions of money to shareholders as a percentage of profit from the operations of the company. As a shareholder, you actually own a piece of a public company so you are sometimes entitled to share in its success (and failure). Dividends can be paid monthly, quarterly, or randomly.
The amount of the dividend is usually $X amount per share.
If you take all of the dividends per share and add them up over a year, and divide by the price of the stock, you can see your ROI.
This is is called the “yield” and it is always displayed in the technical data when researching a stock. I use this number to calculate the Return On Investment or ROI that I will receive from owning this stock.
In addition to the yield, I look at a few other things:
How long has this company been in business?
Is their business still relevant?
How often do they pay out dividends?
Do the dividends increase over time?
Have they ever missed a dividend?
You may notice in the list above that I neglected to mention ‘price’. I don’t care what the price of the stock is if the yield is what I want it to be. I am looking for value. I don’t care whether the price goes up or down. I am not interested in buying low and selling high. I am not a trader. I am in investor. I know what has value to me.
By focusing on buying dividend paying stocks that meet all of my buying criteria, I am approaching the stock market like an investor, not a trader. Trading is gambling. Nobody has a crystal ball so it makes more sense to invest so that you can predict your profits and ensure your returns.
As a value investor, focused on dividends, you are far less concerned about stock market fluctuations and corrections. As long a you are receiving your dividends as passive income on a regular basis, you are succeeding. You are getting richer. As they say, “You will never go broke making a profit”
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There is a series of books written by Derek Foster that really goes into the benefits of dividend investing.
The Lazy Investor - is the first book in the series and really convinced me to re-think my strategy.
He has 5 additional books that expand on his ideas and I have read them all. Even one of these books on its own has the power to change your life. They provide tremendous value.
I developed my investing strategy from trial and error, books, seminars, mentors etc. Each source of information cost me some money. In most cases, not a whole lot. The value I received from them far outweighed the cost. Just like value investing, I looked at the ROI of educating myself. I believe learning how to invest and build wealth is the best investment anyone can make. Once you expand your mind, it can never go back to its old dimensions. You are forever wiser, stronger, and more capable.
You have the ability to become more. You have the ability to grow beyond your current self-imposed limitations and achieve things you never thought possible. You just have to be willing to take a chance on yourself.
Because there is nothing more valuable than YOU.
