The Essence of Value Investing: Forget about the price, understand the value, and leverage the market.

Source: Red and Green

For business investments, anyone with a little business sense knows that when we spend money to acquire a company or a portion of its equity (rarely does anyone acquire 100% of a company's equity at once), the value we obtain has nothing to do with how much money we spend or how much others offer for the company.

When purchasing equity, the true value that investors obtain is nothing more than the commercial value of the company or that portion of equity itself. It has absolutely no relation to what others or the market are willing to offer for that portion of equity or how much it is worth.

But why does things change when it comes to the stock market?

Why should we believe that the value of the stock market relies on the stock price rather than the true value of the company, i.e., the fundamentals, just because the stock market has more active pricing?

A smart investor should realize that Warren Buffett's famous saying, "Price is what you pay, value is what you get," is the truth in this market.

When we spend money to acquire a portion of a company's equity, whether this transaction occurs offline (in the equity trading market, property rights exchange) or online (public stock trading market), the essence of the matter does not change in the slightest. The price we offer in the transaction and the price others give for the stocks we acquire have nothing to do with the true value brought by this transaction.

When a company's profit is 100 yuan, and the market gives it a PE valuation of 100 times, the market value of this company is 10,000 yuan. If the market gives it a PE valuation of 3 times, the market value is 300 yuan. However, does the company's profit change because of this pricing? Generally, it does not change significantly (there may be slight changes due to reflexivity, but the magnitude is usually small, which is not discussed here).

Therefore, when the stock price changes, the company is still the same company, and the value is still the same value; it's just that different people give different prices.

After working for many years, when I realized that the stock price is just a cloud above the value of the investment portfolio, and only the commercial value of the investment portfolio itself is the real thing in hand, I began to look at the securities market from a different perspective, as if waking up from a dream.

In the short term, what does it mean for the stock price to rise or fall? Does a stock price increase represent an increase in value, and a decrease represent a loss of value? No, no, no, there is no relation between them at all.

In the short term, does value change when the stock index rises or falls? No, it doesn't. The stock index is composed of countless stock prices and is itself a price index. Its changes have nothing to do with the value.

In the short term, does value change when the net asset value of a fund rises or falls? This matter needs to be viewed separately. If the net asset value of a fund rises only because of changes in the valuation of the stocks it holds, then the rise in net asset value is just like the fluctuation of emotions in stock prices. However, if the increase in net asset value comes from the value increase caused by the fund manager's transactions, that's a different story. When a stock rises from 10 yuan to 20 yuan, but its valuation simultaneously increases from a PE ratio of 30 to 60, smart investors won't become complacent; they will see the danger. Similarly, when the net asset value of a fund falls from 2 yuan to 1 yuan, while its corresponding portfolio consistently generates profits of 0.1 yuan, smart investors will also realize that the fund's PE ratio is only 10 times, indicating that the opportunities outweigh the risks.

Therefore, for value investors, we should strive to "be praised without being swayed by the world, be criticized without being discouraged by the world," focusing only on measuring value, not stock prices. The humanistic spirit of ancient Chinese culture finds its perfect embodiment in today's value investing, which originated from the Western market economy.

On the other hand, investors who view their investment portfolios from a value perspective rather than a price perspective will not be satisfied with the data provided by conventional stock trading systems.

These commonly seen stock data often provide clear information, such as the current market value of the stocks in your portfolio, the percentage change compared to last year, and how many other investors you have outperformed, etc. This data is usually presented in a simple and understandable manner, making it easy to grasp.

However, this data will not tell you the net assets, annual net profit, dividends, or the changes in these fundamental data compared to last year for the securities in your account.

Likewise, smart investors will not be content with the reports provided by the majority of funds. These reports may tell you the net asset value of the fund and the stocks included in the portfolio, but they will not tell you the combined fundamentals of these stocks.

Similarly, intelligent value investors will not be satisfied with just knowing the point level of stock indices. For example, the statement "The Shanghai and Shenzhen 300 Index has risen 20% compared to last year" is not comprehensive enough. What we would like to know is something like this: "The Shanghai and Shenzhen 300 Index has risen 20% compared to last year, with net profit increasing by 8%, PE ratio increasing by 11%; dividends increasing by 10%, dividend yield increasing by 9%; net assets increasing by 9%, price-to-book ratio increasing by 11%. It can be seen that this is a market where fundamentals and valuations are rising simultaneously."

For investors who understand that "value is the most important, while price is just a passing cloud," obtaining these value-based data is not easy. The reason is simple: the majority of investors in this market do not care about these fundamental data, so there are relatively few calculations available.

In this regard, Warren Buffett has done an excellent job. In the annual reports of Berkshire Hathaway over the past few decades, the first thing he always presents is the company's fundamental data (mainly using net assets as an indicator).

However, thanks to the maturity of modern computer technology, although these fundamental data may not be readily available, as long as we focus and perform some calculations using Excel, obtaining this data is relatively easy. As long as you have these fundamental data, value investors can understand the changes in market prices and the underlying fundamentals, enabling them to have a comprehensive understanding. They not only know the fluctuations in market prices but also understand the changes in the underlying fundamentals.

When the market offers valuable assets at low prices, why not take advantage of the opportunity? And when the market offers assets with high prices but weak profitability, why not sell them?

In the buying and selling transactions of the stock market, short-sighted individuals only see the changes in stock prices. They always believe that the only way to make money is to buy low and sell high in the short term, buying at $3 and selling at $4.

However, smart value investors have a completely different understanding of trading. The purpose of trading is definitely not to make short-term profits or to catch a wave of rising stock prices or avoid a wave of falling stock prices. The real purpose of trading is to buy good assets at low prices and sell overvalued assets at high prices.

In this value-based buying and selling process, smart investors take advantage of the market's ignorance and gradually increase the value of their investment portfolios, disregarding the fluctuations in stock prices.

This increase in value may not have an immediate effect in the short term: the price of assets seems to have no relationship with the increase in value in the short term. However, after many years, when the increase in value accumulates to a certain extent (such as Warren Buffett's increase measured in tens of thousands of times), the subsequent price growth becomes inevitable.