Tag: Value investing

Are you an investor or a speculator?

Are you an investor or a speculator?

If Buffett is the father of value investing then Benjamin Graham was the Godfather but what is the composite of a true investor? Graham wrote Security Analysis, the old testament of value investing along with Intelligent Investor.

Find out how the Godfather fared in the stock market crash of 1929, here.

According to Graham there are two types of investors and spotting your principles early will save you a lot of money in the long run.

Investing vs speculating

The two types of people Graham noticed in the market were investors and speculators. What’s the difference between the two? An investor sees the stock for what it is: ownership of a business which they believe will give them a return in the future. An investor will decide to invest only after performing a fundamental analysis of the intrinsic value of the business. The speculator looks at the price of a stock and decides to invest based on the assumption that someone will be crazy enough to pay more in the future.

How to spot if you are a speculator

Here are some of the traits of a speculator:

  • Speculators only invest in hot new issues or business trends. Snapchat and Tesla spring to mind.
  • A Speculator doesn’t analyse the businesses at all.
  • They do not consider risk or loss of their principle and instead focus on their potential return.
  • And they don’t look at financial reports. If they do, they don’t look at the financial sections in the annual reports and they’ll sell if it sounds like bad news.
  • All speculators focus on the next day, week or month.
  • Most speculators are nervous about their decision and they look to the market for validation. “My stock has gone down 10%, I was wrong, I need to sell ASAP.”
  • They buy and sell based on no new information.
  • Some Speculators try to time the market and are obsessed with what the finance media says.
  • Most speculators have massive FOMO (fear of missing out) and jump in at the wrong time.

There are many people who make a career out of the above but they are usually very skilled traders with a unique set of abilities. The intelligent speculators usually profit from the stupid money though.

How to spot if you are an investor

  • Investors have no problem with being a contrarian and will happily invest in unloved businesses/ industries.
  • True investors can’t analyse a business enough, furthermore they are looking for hidden assets and liabilities and evaluating the fair value.
  • They are seeking opportunities to buy high quality shares with strong historical earnings growth and good future potential at undervalued prices relative to long-term fundamentals.
  • Most investors put quarterly and annual report dates into their calendar and enjoy reading them – regardless of the content.
  • You won’t sell based on one, two or even four bad quarters but you will reassess the fair value of the stock and only act after thought, analysis and careful consideration.
  • They look to hold a stock for more than 5 years.
  • Investors are calm about their decisions because they are based on sound fundamental analysis. They are willing to be patient and wait for the price to reflect the businesses intrinsic value.
  • Investors avoid investments that do not offer an acceptable risk-adjusted return and may risk the principle.
  • They continue to buy when their stock choice has fallen by 10%, 20% or even 50%.
  • Investors consider market gyrations and are ready to poise if the market is out of kilter and speculators are panic selling. They will consider the market and economy but it will have little effect on their investing decisions.
  • Investors observe financial ratios such as price/earnings, price/book, ROE, EV and dividend yields.

Price is what you pay - investor warren Buffet

Next time we will look at whether you are an active investor or a passive investor. If you scored highly on the speculator front then this blog will certainly aim to guide you away from such behaviour. It’s so important to take advantage of this advice now whilst time and compounding is on your side.

Speculating £1,000 today and losing it all is costing you £117,000 if you had placed it into a low-cost index fund which tracked the market at 10% with reinvested dividends for 50 years…

Not a difficult decision when you look at it like that.

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Undervalued stocks can still lose 70%

Undervalued stocks can still lose 70%

My portfolio consists of many undervalued stocks which I could argue were worth at least double their current prices. Despite this, I always wondered how they might fare in a 1929 type crash.

If you hadn’t guessed by now, I’m a value investor. Why? It’s a time-tested strategy and it has made people from Graham and Doddsville an awful lot of money. Its methodology is intelligent and based on fundamental business analysis. I urge all Money Generation XYZ readers to follow this system of investing and ignore everything else. Forget binary trading, overlook Fibonacci retracements and don’t time the market. Just focus on companies with fortress-like balance sheets, strong historical earnings and a durable economic moat trading at a discount to fair value.

Discover whether you are an investor or a speculator, here.

Undervalued stocks during a crash

To see how value investing performed during 1929 I had to turn to the old testament of value investing: Benjamin Graham’s and David Dodd’s Security Analysis. Here’s a window into the life of a value investor in 1929.


Graham was convinced that, because his stocks were worth less than the cash on the companies’ balance sheets, he couldn’t be harmed by the impending crash which he foresaw. So much so, that he used leverage to amplify his potential returns. In 1929 Graham lost 20% of his partnership’s capital – pretty impressive all things considered – another 50% in 1930, 16% in 1931 and 3% in 1932. A cumulative loss of roughly 70%.

“I blamed myself not so much for my failure to protect myself against the disaster I had been predicting, as for having slipped into an extravagant way of life which I hadn’t the temperament or capacity to enjoy. I quickly convinced myself that the true key to material happiness lay in a modest standard of living which could be achieved with little difficulty under almost all economic conditions.”

– Benjamin Graham.

There are tons of lessons here. It certainly shows that a large margin of safety cannot protect against a crash. Here are a few tips to counter the mistakes that Benjamin made back in 1929.

 Live within your means

Ask yourself, if my portfolio dropped by 70% tomorrow then I would I care? I wouldn’t. I’m still entitled to the same earnings as before and my ownership of the company hasn’t changed. I am mentally and financially well placed to cope with such market extremities but they will certainly be testing times if you aren’t.

Before you invest, set aside capital to cover between 3-6 months of bills in the event that you lose your job. For me, this buffer is £3,600. This sounds like a lot now but as you grow your net worth it’ll be a smaller proportion. Save like a pro and you’ll have that money in no time. Try not to buy a car on finance either, it’s a sure-fire way to erode your potential savings and adds an extra layer of risk to your situation.

 Never use leverage

Leverage no doubt amplified Graham’s losses. Debt masquerades itself as the answer to bountiful returns when times are good and reveals itself as the devil in disguise when times turn bad. Times will always turn bad. Investing on a margin will drive you to make really irrational investment decisions. See what Warren Buffett says about leverage here. If you want no assets, then leverage up baby!

Warren Buffett leverage quote

Materialism isn’t the answer to happiness

Buying that car on finance, that expensive watch or that big house with a 5% deposit is fine but it will offer very little satisfaction in the long run. When things go belly up they will cause a strain on the important things in life such as your relationships and mental well-being.

Money can certainly play a role in happiness and stop a poor standard of living but there is a threshold according to behavioral economists. Focus on living comfortably and drawing happiness from the people and the world around you.

Collect moments not things - materialism

Don’t time the market, position yourself

Look, what’s the point in standing on the side-lines of the market in the case of a crash? One day you will be right but you would have been wrong every day for the last 10 years. Graham predicted a market crash but he did not protect his portfolio or his personal finances. That’s where he went wrong. A crash may destroy the value of your portfolio regardless of whether it’s undervalued or not.

To be fair to Graham, he didn’t know that his undervalued stocks would crash just as hard as everything else. He had an excuse – we don’t…

Ned stark meme "brace yourself"

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