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Long Term Investing & Value Investing_Any Difference?

Long Term Investing & Value Investing_Any Difference?

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Published by Aaron Hee
Is value-investing and long-term investing the same?
Is value-investing and long-term investing the same?

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Published by: Aaron Hee on Jun 24, 2012
Copyright:Attribution Non-commercial


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Long-term Investing & Value-Investing: Any difference?
By Aaron Hee
16 February 20097 January 2010 (Revised)
Long-term investing and Value Investing. I aim to achieve a clear distinction between thesetwo concepts in this article with some digression into other investment issues. Before itsmajor difference struck me, I thought both were the same, that one is identical to another. After one particular event, I realised such misconception could lead to financial loss-something that you don't want to experience.Lets get started by clarifying a core concept – ‘Value Investing’ and ‘Long-term Investing’ aretwo different approach. However, long-term investing is a subset of value investing. Theopposite, though is absolutely wrong, invalid and financially fatal.What particular event brought me to discuss this issue? In Dec'08, I was back home inMalaysia. I tried seeking for capital from friends to invest on their behalf. One of my efforts ledto discussion of my venture with my friend's dad - in order to gain approval from his dad for some capital. This gentleman is a successful businessman in his own rights. He has seensuccesses, booms and recessions (in other words, businesses collapsing) and how the stockmarket pushes and bullies investor in spite of whatever approach, strategies and methodsthat guides the investor.During the discussion, I tried to convince him of my approach, explaining my method andfundamentals and techniques and so on, so forth. Based on experience alone, I am next tonothing compared to this successful businessman. You might find it stupid and irrational for me to go ahead with my investment and helping people to invest (or burning their money inyour terms) given my major lack of experience. To compensate for this, I equipped myself with practical advice- established for more than half a century and practiced and proven bymany well-known successful investors. Well, learning is one thing and doing is it is another.Can’t deny that. But how wrong can I go if I am discerning and diligent in my education? Don'tget me wrong- I am not implying that these methods are flawless. In fact, being aninexperience investor, my poor execution (hopefully it wouldn’t happen) might tarnish thereputation of the advice.From the very beginning, his responses and reactions to my ideas were filled with completepessimism. Couldn’t’ blame him. The market was off the cliff. This businessman was drowned
in sea of pessimism due to losses in his stockholdings, slowdown in his business and storiesfrom his wealthy friends how bad they were doing. He was even adamant that fundamentalsdo not work in such bad times. To be honest, even during boom times or bull markets,fundamentals hardly remain intact. Market tends to deviate from fundamentals frequently.Those investors who made it big exploited this deviation by sticking close to their principlesand a strong belief that fundamentals will remain fundamentals. He was adamant from thevery beginning that what I am doing was big-time mistakes - both in investing in currentmarket and trying to invest people's money without experience. I accept the latter part. I lackexperience. But the former , it's rather subjective. Time will tell. From that very point onwards,I knew my chances of raising fresh capital is less than zero. At least through that discussion, Iwas enlightened in this aspect.When someone invest for the long-term, the majority will say that this is a minimum-risk andwise investment since in the long-run markets will trend upwards. True to an extent. If youthink this statement is correct, then continue reading.When I was discussing my approach as long-term, he started explaining the flaws of fundamentals and long-term investment. He gave me real-life examples. He described someof his investments to me - his approach, his holdings. One particular holdings of his wasbought because of interaction with a very senior executive of that company who reaffirmedhim and the rest of the market of the bright prospects of the executive's company. Honestly,the only answer the executive can give, in summary is 'our company is on the right track anddoing well-expect for more'. Who will actually provide a true and honest pros and conscomparison when trying to sell you and the rest something. With this, decision was made,bought the shares during boom time expecting to hold for the long term, came the marketdownturn, and saw his holding fall in value substantially, then started blaming that long-terminvesting does not work. Another approach that I could recognised was buying big, blue-chipcompanies because they
tend to go up
. Does this mean that blue chip firms will continueperforming brilliantly for an indefinite time? It isn’t wrong when you have done proper analysis, however, buying blue-chips because it ‘tend to go up’ does not reflect proper investing. What's the lesson? Do not buy on what others say, buy based on your analysis beit a blue-chip or not. And, up market will eventually be followed by a down market. Nothing ispermanent especially in the financial markets.
In the long run, yes, he might recoup his losses. But how long will that take? One thing hecannot recover - opportunity costs. Aha, time value of money. Relate to compounding andyou can see the extent of losses actually incurred if the capital is wisely invested.Long-term investing is only successful if you relate it too value investing. Value investing, in anutshell is all about identifying deviations and discrepancy between price and value. Exploit itwisely and money starts snowballing into your pocket. How to exploit? Simple. Everyone doesthis. We buy when things are on sale. So,
buy when something is cheap relative to the valueyou are getting in return.
But the problem is this- it is difficult to define value of a company. Itis not necessary to place specific figures on this value. After all, value is a subjective term andinvesting is a form of art. Take Benjamin Graham's analogy- ‘you don’t need a scale to tell if someone is overweight’. In simple terms, profit by buying low and selling high. We all knowthis. Logical and sensible, isn’t it? Yet, the opposite is often practiced. How could someone beso whacked out of his or her mind to
buy high and sell low 
? One word –
That wouldbe another topic of discussion sometime in the future.The main idea is your entry point when purchasing a share. When it is overpriced, and youbuy this company, you are expecting the market to go higher (recall tech bubble in at thebeginning of the century). But heated markets will cool down or worse, things will start tocollapse. So, your downside is way greater than your upside. There is still upside, but withminimum probability. Where as if you bought it at a lower price, or a discounted price to its fair value, your downside is lower since the company either has the potential to unlock its value or the market will gradually recognise and reward it with higher valuation. To make yourself feelbetter when things fall, or worse, collapse, you will start saying to yourself you are buying for the long-term.Take this for example. Your share value falls by 50% from $100 to $50. In order to break-even or coming back to your original position, you need to gain 100% of the current value of $50. Assuming the general market grows by 15% annually after this downturn (this is a veryoptimistic projection), you need 5 years to recoup your losses assuming you do not cost-average your losses. 5 years past and you only broke-even. So much for long-term investing. Again, relate this to compounding. Assuming after so many years you could not recover your loss of $50. Is your actual loss limited to $50? Not really. Factor in the opportunity costs of having the initial capital invested in bank. At a given interest rate of 3% per annum (again, thisrate is extremely high given today’s condition. This article was written sometime ago beforethe market was on its knee) compounded for 5 years, you will get $115.93 in Year 5. So there

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