Source: Qilehui
Introduction:
Investing has long been a challenging hurdle that many people strive to overcome but struggle to master. Simply put, anyone can invest, but achieving investment success is far from easy.
Nowadays, all the well-known investment gurus are value investors—Buffett, Peter Lynch, Charlie Munger, and others. If you want to emulate them, you must first understand what value investing is and learn how they achieved such success.
1. The Four Principles of Value Investing
So what is value investing? Value investing was first formulated as a systematic approach by Benjamin Graham some eight to nine decades ago. Among today's leading figures and prominent representatives of value investing, the well-known Mr. Buffett undoubtedly stands out.
There are only four principles of value investing. Remember, just four. The first three are concepts from Buffett's teacher, Benjamin Graham, and the last one is Buffett's own unique contribution.
First, stocks are not merely tradable securities; they are, in essence, certificates of ownership that confer partial ownership of a company.
This is the first key concept: investing in stocks essentially means investing in a company. As GDP grows and the market economy continues to expand, the company's value is continually created. In the process of this value creation, as partial owners, our share of that value also increases along with the company's overall valuation.
So if we invest as shareholders and support the company, we can share in its value‑creating growth—this approach is sustainable.
What is the right path, and what is the wrong one? The right path is when what you gain is what you rightfully deserve; thus, such investing is a broad, righteous way. Yet very few people are willing to view stocks in this light.
Second, understand what the market is.
On the one hand, a stock represents partial ownership; on the other, it is indeed a tradable security that can be bought and sold at any time. In this market, there are always buyers and sellers making offers. So how should we interpret this phenomenon?
In the eyes of value investors, the market exists solely to serve you. It offers opportunities to acquire ownership stakes and, should you need cash many years down the line, the chance to liquidate those holdings. Thus, the market is there to serve you. It can never tell you what true value is; all it ever reveals is the price.
Third, the essence of investing is forecasting the future, and such forecasts can never be 100% accurate—they can only range from zero to nearly one hundred.
When making investment decisions, it's essential to build in a substantial margin of safety. Since you can never be absolutely certain, even in situations where you feel very confident, always keep a buffer: your purchase price should be significantly below the company's intrinsic value. This principle is the third most important concept in value investing.
For example, even if you're 80% or 90% confident, since 100% certainty is unattainable, the occurrence of that remaining 10% or 20% possibility can still undermine your intrinsic value. However, with a sufficiently wide margin of safety, you won't suffer excessive losses. Requiring a substantial margin of safety on every investment is a key skill in investing.
Fourth, through his fifty years of experience, Buffett introduced a concept: investors can, through sustained, long-term effort, truly expand their circle of competence, gaining a deeper understanding of certain companies and industries than almost anyone else, and making more accurate predictions about those companies' long-term future performance than anyone else. Within this circle lies one's unique capability.
The most crucial aspect of the circle of competence is its boundary. A capability without clear boundaries is not a true capability. If you hold a view, you must be able to articulate the conditions under which that view would fail; only then does it qualify as a genuine perspective.
If I'm simply told that this is the conclusion, then that conclusion must be wrong—it certainly won't stand up to scrutiny. Why is the concept of the "circle of competence" so important? Because of the "market."
What is the purpose of the market?
For market participants, the very purpose of the market is to expose human frailties. Any aspects of yourself that you haven't truly understood—whether psychological or physiological—will inevitably surface under certain market conditions. Anyone here who has ever navigated the markets knows exactly what I mean.
2. Value investing is the right path, the great way.
Taken together, these four aspects constitute the full meaning and the most fundamental principles of value investing. The philosophy of value investing is not only simple and clear to articulate but also a straight and righteous path.
The right path is what is sustainable.
What is sustainable? Sustainable practices share one common trait: the outcomes you achieve are perceived—by others, by everyone—as something you rightfully deserve. That's what makes them sustainable. If, upon openly revealing your method of making money without holding anything back, people conclude that you're a fraud, then that method is certainly not sustainable.
If you were to share your methods for making money, step by step and without reservation, with everyone, and they all came to believe that your approach is truly sound, genuinely excellent, and worthy of admiration, then that would be sustainable. That is what we call the Great Way; that is what we call the Right Path.
Why is value investing itself a righteous and principled path?
Because it teaches you that investing in stocks is, in essence, investing in ownership of a company. Investing first helps bring a company's market capitalization closer to its true intrinsic value, which benefits the company.
As you help the company, you're also steadily enhancing your own intrinsic value. In the end, you benefit the economy, the company, and yourself—and along the way, you reward yourself as well. The returns you receive are what you deserve, and others recognize that you've earned them. That's why this is the right path.
3. Value investing sounds simple, but it's hard to put into practice.
This is the entire philosophy of value investing. It sounds remarkably simple and perfectly logical. But what does reality look like?
In the actual investment process, such investors represent a vanishingly small share of the entire market—extremely few. Virtually every investment theory attracts legions of followers, yet true value investors remain in the minority. As a result, the hallmark of investing is that most people have no idea what you're doing, and the outcome often ends up being a wealth‑destroying one.
Meanwhile, the main avenue of investment is utterly deserted, eerily quiet. Where has everyone gone? The side paths, by contrast, are bustling with activity. Why take the detour? Because the broad, straight road often leads only at a snail's pace. As we all know in life, a company's success demands countless people, ample time, relentless effort—and a bit of luck. Thus, the journey is a challenging one.
Another difficult aspect is that your judgment about the future is also very hard to make.
The art of investing lies in forecasting the future. To truly understand a company or an industry, you must be able to assess its prospects over the next five to ten years. With so many uncertainties, most industries and companies simply cannot be predicted that far ahead.
But is it entirely nonexistent? Not exactly. In fact, if you truly put in the effort, you'll find that in certain companies and industries, you can clearly see what the company's worst‑case scenario might look like in ten years—perhaps even far better than that. Yet achieving such a level of insight requires years of relentless dedication and years of rigorous study.
When you're able to make this kind of judgment, you begin to define your circle of competence. At first, that circle is invariably very narrow, and it takes an exceedingly long time to build it. That's why value investing is, in itself, a long and arduous journey: though it will surely lead to success, most people are unwilling to walk the path. It truly demands vast amounts of time—and even after investing so much, one's understanding remains limited.
Anyone who overextends themselves by taking on more than they can handle will inevitably ruin themselves in a particular market environment. The market itself is a mechanism that exposes your weaknesses.
The most fundamental requirement in this industry is to be utterly honest—100 percent truthful—in your knowledge. Never, ever deceive yourself, because you're the easiest person to fool, especially in this line of work. As long as you stay in that seat, you can tell others lies; and when you repeat them often enough, even you end up believing them. But someone like that will never become an outstanding investor—they'll inevitably be destroyed under certain market conditions.
4. The broad road ahead is reserved for those who persevere.
Value investing may seem like a smooth, straight path, but in reality, it is far from guaranteeing success.
Because this market always gives the impression that short-term profits are within reach, people tend to focus their time, energy, and ingenuity on making quick‑turnaround market forecasts. That's why they're eager to take shortcuts rather than follow the long, steady path. In reality, however, almost every shortcut ends up becoming a detour—or even a dead end.
Thus, over the long term—and at least according to U.S. trading records—almost all so‑called strategies and approaches designed for short‑term trading have virtually no track record of sustained success. By contrast, among those investment portfolios that deliver truly enduring, outstanding performance, nearly all adhere to a value‑investing philosophy.
Short-term investment performance is often driven by market-wide luck, rather than your individual skill. In the short run, there will always be winners and losers, but over the long term, true winners are few and far between. This is a central question in evaluating value investing: is it a matter of luck, or of skill?
When the market delivers positive returns for 15 consecutive years, the average cumulative return is 14%. In such a scenario, you don't need to be a genius—your performance will still be outstanding simply by staying invested. However, there are also periods when the market posts negative returns for over a decade; if your returns during those times are exceptionally strong, that changes the picture entirely.
Although this broad, well‑paved road surely leads to success and is never congested, very few people take it; yet the success those who do walk it achieve truly seems, in the eyes of others, to be exactly what they deserve.
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Editor/rice