Value investing: Many believe they are practicing value investing but they are fooling themselves.
Today is the first part of our 6 day long special on value investing.
First, one has to find someone who has actually become financially independent solely from safe high yield value investing. How do you know for sure? You need to ask the prospective financial adviser how much their annual dividend income is from their investments and also their age. Someone 75 years old with only $15,000 of annual dividend income is not better than someone who has $85,000 dollars of dividend income and is 45 years old. Dividends are the first sign of safe high yield value investing. Those who have built a “dividend machine” that more than pays their living expenses before age 55 has a damn good idea on how to beat the stock market and, no doubt, practices value investing. Dividends are the sure sign of an excellent value investor who actually practices value investing and just doesn’t talk about it.
Second, margin of safety is always told to be a key part of value investing. The one thing I would like to clarify about is when famed value investing guru LI LU speaks about buying a dollar for 50 cents and having a margin of safety. While I do not disagree with this “theory”, I believe it’s like a sense of humor. Many THINK they have one, but in fact few actually do. Very few folks who believe they are value investing are actually do it.
Many who bought Citigroup at $35 like Eddie Lampert THOUGHT it had a margin of safety. As it turns out, Mr. Lampert was not practicing value investing as many who followed him into that investment found out.
In fact, NO human being could evaluate ALL the derivatives on Citigroup’s balance sheets. So in essence, Mr. Lampert and any investor in Citigroup was really gambling and not value investing.
Come back tomorrow and read part 2 on the keys to successful value investing.