On Investing in the First Place
We invest so that we can create further wealth. We do so by forgoing current consumption and putting our money to “work” to achieve returns year over year. Over time, the compounding of your investments can truly have some remarkable results. It doesn’t take a huge percentage of return to make a large difference over time. Below is a table showing what investing $100,000 can grow to, compounded for different time periods at various rates:
Often, Warren Buffett will note the story of the Manhattan Indians when referencing compounding investments. They sold their island to Peter Minuit in 1626, where they received $24 net. For this, Minuit received 22.3 square miles. He states “a $20 per square foot estimate seems reasonable giving a current land value for the island of $12,433,766,400 ($12.5 billion). To the novice, perhaps this sounds like a decent deal. However, the Indians have only had to achieve a 6.5% return (The tribal mutual fund representative would have promised them this) to obtain the last laugh on Minuit. At 6.5%, $24 becomes $42,105,772,800 ($42 billion) in 338years, and if they managed to squeeze out an extra half point to get to 7%, the present value becomes $205 billion.
On Value Investing
Value investing consists of finding companies that are “on-sale at a discount”. In other words, value investors seek companies that are trading below what we assess to be their true worth. At any given time in the investment community, there are companies that are out-of-favor. The reasons Wall Street doesn’t like a company can vary widely. With some companies, the market may be dismissing the company because of short-cuts that are ingrained from prior experiences, making them dismiss certain situations that arise. As value investors, we are trying to uncover the companies that the market is dismissing and therefore has mispriced their stock. An important thing to note that value investing does not have to be seeking high quality assets. While in my opinion it is ideal to do so, there are situations where a company is trading at such a steep discount to its intrinsic value (despite it being a sub-par business) that buying the stock will prove to be a viable investment. From Sleepy Capital’s standpoint, we are seeking companies that are higher quality assets that can be held for 3 – 5+ years.
The Great Investors
Value investing is widely known because of those of some of the great investors of our time that focus(ed) on a value strategy. Despite this, the majority of investors out there are not value investors. That’s because value investing is not easy. It’s supposed to be hard. If it was easy, then everyone would do it. But difficulty doesn’t mean it has to be complex. In my opinion, the difficulty lies in patience and resilience of the mind to blocking out the market’s opinions.
[ Great investor pages coming soon ]