25-01-2019, 11:44 AM
Investing in general comes with two challenges:
There is also the challenge that is created due to the design of the stock market. By design, the stock market is full of people constantly making decisions. There are people with different incentives and motivations to participate in the market. There are also different incentive time-frames. The one stock that is a horrible choice for a short term trader, is a great opportunity for another. So, when something is unpredictable by design it is hard to stay disciplined and invest based on a specific discipline.
One of those disciplines is value investing. Value investors invest in the stock market based on the idea of finding high value stocks at a low price. They use this discipline to cope with the uncertain / unpredictable nature of the market. But then the challenge is how your would identify the value of a stock, so that you can buy it for cheap, which is complex for some and uncertain.
Value investors look for what is called “margin of safety”. That is a percentage they add to their calculation of a share price in order to give them some safety from potential uncertainty of the market. And this is not an easy process. Multiple ways to calculate the fair value and multiple assumptions needed to get there. A DCF for example, consist of assumptions of the company's weighted average cost of capital (WACC) and forecasting a terminal value. These inputs require a great deal of good judgement in not only the business but industry level knowledge and macro landscape. Hence, the DCF can very easily result in varying outputs among value investors and can provide a wide range of intrinsic value if assumptions are wrong.
So, to wrap up, investing is hard because market is unpredictable and as an investor you are prone to make mistakes. Even you eliminate your mistakes, markets nature makes it difficult to be an investors. And value investors have an additional difficulty. That is due to the difficulties that come with estimating the value of a company.
Let me know what are some challenges you face in value investing... I look forward to hear from you.
Happy investing! [Free Download] Guide to investing in deep value stocks for 2019
- Uncertainty and unpredictability of the market
- Human errors and misjudgments
There is also the challenge that is created due to the design of the stock market. By design, the stock market is full of people constantly making decisions. There are people with different incentives and motivations to participate in the market. There are also different incentive time-frames. The one stock that is a horrible choice for a short term trader, is a great opportunity for another. So, when something is unpredictable by design it is hard to stay disciplined and invest based on a specific discipline.
One of those disciplines is value investing. Value investors invest in the stock market based on the idea of finding high value stocks at a low price. They use this discipline to cope with the uncertain / unpredictable nature of the market. But then the challenge is how your would identify the value of a stock, so that you can buy it for cheap, which is complex for some and uncertain.
Value investors look for what is called “margin of safety”. That is a percentage they add to their calculation of a share price in order to give them some safety from potential uncertainty of the market. And this is not an easy process. Multiple ways to calculate the fair value and multiple assumptions needed to get there. A DCF for example, consist of assumptions of the company's weighted average cost of capital (WACC) and forecasting a terminal value. These inputs require a great deal of good judgement in not only the business but industry level knowledge and macro landscape. Hence, the DCF can very easily result in varying outputs among value investors and can provide a wide range of intrinsic value if assumptions are wrong.
So, to wrap up, investing is hard because market is unpredictable and as an investor you are prone to make mistakes. Even you eliminate your mistakes, markets nature makes it difficult to be an investors. And value investors have an additional difficulty. That is due to the difficulties that come with estimating the value of a company.
Let me know what are some challenges you face in value investing... I look forward to hear from you.
Happy investing! [Free Download] Guide to investing in deep value stocks for 2019