Value Investing Principle #1

Today I’m going to talk about Value Investing Principle #1.

There are 4 simple principles for Value Investing. They’re guidelines which will help you immensely when deciding which stock you should invest in. I don’t want to spend all my free time trying to figure out which stock I should buy, or be influenced by “the next big thing” or scared off when prices start to drop. These 4 principles provide an easy to follow, systematic approach. So let’s dive into the first principle.

Value Investing Principle #1: You are capable of understanding the business you are investing in

Did you major in business in university? Because I did not. I got my Bachelor’s Degree in Nursing which seems like it’s miles away from the business world and frankly, seems a bit out of my league. But I’m able and willing to learn so let’s tackle this.

I’ve worked for a public employer for the entirety of my career, in a non management position. This means I’ve shown up for work and done my job with little involvement in the “behind the scenes” business aspects of what makes the place run. And that’s okay. It just means I have a knowledge gap and I’ll have to figure out how to transfer the knowledge I do have into learning about understanding a business.

So principle #1 guides you to look at buying a stock as if you were buying the whole business. The idea behind this is when you know and understand the business, this will help you decide if you should invest in the stock. Approaching buying a stock in this manner will help you learn what its value is, thus how much you should pay for a stock.

Just an FYI, there are going to be more businesses you don’t understand than understand, and this is okay.

You need to be truthful with yourself about what you don’t know and can’t understand. Don’t waste time beating yourself up for what you don’t know. Spend time appreciating what you do know and are capable of understanding. You’ll likely surprise yourself with the unique things you do know about.

Take some time thinking about what you are already “invested” in. Understand what your circle of competence is. 

• What are your interests?
  
• Where do you already have knowledge?
  
• What are your hobbies?
  
• Where do you spend your money?
  
• What are you passionate about?
  
• Where do you make money?
  

Write down your answers to the above questions and then start to think about what businesses are associated with those interests. Then start reading about them. You’ll know quickly whether the business is something you’re interested in reading more about and can add to your “learn more about” list or you can skip over it and never give it a second thought..

When you understand the business, you can move onto the next step which involves diving into the business at a deeper level.

​