1. What is Value Investing?

[Music] welcome the course one unit one lesson what is value investing in this lesson we're gonna have three objectives the first objective is the difference between value trading and value investing the difference between an asset and a liability and created value investment so to get this started we're gonna go ahead and go to a person's site called Kyle McDonald okay so here I am at Kyle MacDonald's website called one red paperclip and what he did was he had an experiment where he started off with one red paperclip and he wanted to see if he could trade that up in value and see what the item was that he could trade it into so he started off with one red paperclip and as you look at his site will click on the next thing that he traded the paperclip for and as he was trying to go up in value let's just say that his paperclip was worth maybe five cents so he traded up to a fish pen was the next item so let's just say the fish pen was worth a dollar so we'll click and see what he traded the fish pin for here and he traded the fish pen for what looks to be a doorknob and so he kept trading items up up and up and up and he started off as you look at his little timeline here with the pictures you can see where he started off with the paperclip to the fish pen to the doorknob to like a Coleman stove and each item kept progressively getting more valuable clear up to a house and he traded all of those items within a year to a year and a half and something that he understood was that he he knew with the value of the next item that he was trading up up into what it was worth and so he just took advantage of that and till he actually owned a home so let's go to some slides and pick this apart and see what was actually going on so this is the big question was Kyle MacDonald conducting value trading or value investing since this first lesson is about value investing you probably have a pretty good idea of where I'm going with this and that Kyle was actually doing what I would call value trading there's a pretty big difference between value investing and value training in my opinion so let's go ahead and take a look at this so okay when he made that trade with the other person for that fish pen when that trade happened that fish pen is he held that and he was waiting to trade that for the doorknob let's say that that was over a 10-day period as he was holding that fish pen immediately after the trade with the paperclip that 10 days that he held on to that fish pendant the fish pen become more valuable during that time period during those 10 days that the fish pen let's just call it let's just say it was worth $1 over that 10 day period that the fish pen now become worth a dollar and 10 cents or let's say he held that fish pen for a year with the fish pen then become worth a dollar and 10 cents or a dollar and 20 cents or would it still be generally worth $1 not to include the inflation on it and to answer that you you'd obviously have to say that the fish pen did not grow in value while he held it it just pretty much stayed exactly the same it didn't grow in value at all so that's that's why I would say that this is value trading opposed to value investing so as we look at that difference of that growth while you're holding the item or the asset you're gonna find that an asset if you'd hold an asset throughout that trading period it would not only hold its value but it also grow in value put more money in your pocket so in order to understand value investing we have to step in here and figure out what is an asset okay because the fish pen that's not an asset that's just an item that's gonna continue to hold its its value so as we look at these four items on the screen you can see in the top left there there's a house okay what would you say that that's an asset or not now some people a lot of people will argue that a house is an asset I would not argue that I would say that it's that it is not an asset it simply maintains its value as you look at the next spot over there let's just this is an apartment building now this is something that we can consider an asset because after you buy this this is gonna continue to put more and more money into your pocket okay I've put the microwave in here as a representation of a patent let's say you had a patent on a part inside of the microwave so that patent would be an enormous asset because you're not really having to pay anything out in order to possess it unless you purchase the patent from somebody but let's say you came up with a patent that is gonna continue to put money in your pocket every single month okay in the last one the car so when you mount a car its decreasing in value every every year every month and not only that but you're making payments on the car every single month so in the end that's definitely not an asset and that's something we would actually call a liability to summarize when you're talking about NASA the the simple way to look at it is an asset is something that's gonna continue to put more money in your pocket every single month as you continue to own it so let's go over here and look at a liability so there's the car which is the liability and I'm sure you can think of many other things in your day-to-day life that takes money out of your pocket every single paycheck and that is definitely something that you can classify as a liability so assets vs. liabilities as I said the assets gonna put money into your pocket the liability is going to take that money and take it out so when we're trying to define a person who's wealthy versus a person who's not wealthy the wealthy person is the person who accumulates assets every month they're doing whatever it takes in order for them to buy and own and possess more and more assets so I obviously use the apartment building there that they have three apartment phones but that could be anything you could the assets could be the apartment buildings it could be the patent it could be a small stock which oh that's what we're really going to be focusing on throughout this entire website but each time you own that asset it's putting more and more money in your pocket each month so the wealthy and the rich people they accumulate assets and they do everything in their power to minimize their liabilities because that's what takes the money out of their pocket and so the opposite of that would be necessarily a poor person it could be whoever but here's a person that has one asset which is their job and it pays them you know their salary and it goes into their pocket and then this person accumulates liabilities and so they have the exact opposite thing happening where they can really never improve their way of life and their and their social standing so what is value investing we talked about value trading with the paperclip and how Kyle McDonald was always trading that paperclip up but the difference between value trading and value investing is when you value invest you do exactly what Kyle was doing with the paper clips but you're doing it with assets so while you're holding that fish pen for ten days or a year or whatever the case would be that fish pen is actually growing in value and it's increasing and putting more money in your pocket as you wait for the next trade if you even do the next trade the asset alone might be enough to just keep putting money in your pocket so that's really what value vesting is it's a combination of both of those things that we just learned about okay so I'm gonna walk you through a scenario here so that we can see how Warren Buffett invests so when Warren Buffett conducts value investing it would go something like this Wow look here's a company called See's candy I'm going to look at all their financial information and determine what I think this company is worth after a little analysis he determines that the company is worth $40 a share in an effort to buy the shares of the company he looks at what he can buy the shares for on the stock market so he goes on his computer and downsizes his game of bridge and looks at the market price or a trading price of that company after reviewing the market price he notices that the shares are only selling for $30 a share which is $10 less than what he thought the company was worth per share wow what a great deal I'm going to buy some shares of this company had a really good deal then while I own part of this great company I'll continue to get paid for owning this asset in the long run Buffett purchases the company and it returns to his intrinsic value of 40 dollars a share and he gets paid money every month from the sale the product that the company makes so that's really what he's doing in a nutshell is he goes in he could care less what that company is trading for in the market he just doesn't care he doesn't even look at that he goes right to the financial data he looks at the company and he figures out what he thinks the company's worth okay he thinks it's worth $40 a share and then he goes and looks at what the company's actually trading trading for per share so he'd go on and he'd look and be like oh it's trading for 30 I thought it was worth 40 I think it's a good business so I'm gonna buy it and he does and then he holds it and then that asset continues to pay him month in and month out all right although Warren Buffett is a really smart guy he actually learned two fundamentals of value investing from his Columbia professor Benjamin Graham Graham is often known as the godfather of value investing and he's written two very famous books those books are security analysis and the intelligent investor both of these books are what Warren Buffett mostly attributes his investing knowledge from the problem with both of these books are they're not entry level investing books so they're hard to understand and if you're a beginner it's not gonna be easy so that's where we come into the picture the purpose of this site Buffett's books calm is to teach you how to invest like Warren Buffett but what we're really doing is taking the complex ideas and lessons from Benjamin Graham's books and teaching them to you in an easy-to-understand and interactive format in the annual learn the elements of value investing so you can invest just like Buffett and Benjamin Graham okay so in this lesson we covered three course objectives and they were the difference between value trading and value investing which we learned we want to be doing the value investing what the difference is between an asset and a liability and we know we want to accumulate as many assets as possible and the third was who created and uses value investing and that was obviously you Benjamin Graham and Warren Buffett the key terms that we learned in this lesson were value investing assets liabilities and intrinsic value as a note from the first lesson I want to highlight that at the bottom of each lesson page is the location where all the key McCabe yep if you click on the term a pop-up box will appear in the definition for that term will pop in there if you'd like to read more on Powell McDonald's red paperclip story feel free to click on the link below for his book it'll take you to him as on if you're interested in buying that okay so thanks for watching and I'll see you in the next lesson [Music]

Channel: Preston Pysh

Views: 1,177,333

Rating: 4.9120083 out of 5

Keywords: What is Value Investing, Benjamin Graham, Warren Buffett, Market, Trading, Security Analysis, The Intelligent Investor, Graham Value Investing, One Red Paperclip

Id: KfDB9e_cO4k

Length: 11min 25sec (685 seconds)

Published: Mon Apr 16 2012