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The Secret Of Common-Sense Investing

The Motley FoolDid you know that at certain times of the day and also on certain days of the week, supermarkets here in Singapore will slash the price of selected grocery items?

You need to be on your toes to take advantage of the offers, though. They can be snapped up quite quickly – most probably by me, if the cut-price stuff happens to be on my regular shopping list.

From a retailer’s perspective slashing prices can help to shift unwanted items quickly. From a consumer’s point of view, it is just a fabulous opportunity to make a small dent in the cost of living.

Fill your basket

Thing to remember is that there is nothing inherently wrong or fundamentally substandard about these cut-price goods.

Benjamin Graham, the father of value investing, once quipped that we should shop for common stocks the same way that we buy groceries. I shop for groceries like I buy common stocks. If something is on offer and if it is also something that I like and use regularly then I will not hesitate to fill my basket.

There are, as Benjamin Graham pointed out, interesting parallels between the way we shop for groceries and the way we should buy stocks for our portfolios.

Warren Buffett once said that if a man is going to buy hamburgers for the rest of his life, he is going to sing the Hallelujah Chorus, if hamburgers go down in price. But he is going to weep should prices go up.

For most people, it can be the same with everything else they buy in life. That is except for when it comes to buying stocks.

Buy high-sell low?

When stock prices go down, and you can buy more for your money, people, for some inexplicable reason, don’t like them anymore. But when prices happen to be on the rise, it seems that they clamber over each other to grab a piece of the action, at any price.

I have never quite understood the logic of buying things when they are expensive.

Time and again, the stock market will present us with wonderful buying opportunities. But time and again, we choose to turn our backs on the market when stocks are selling at a discount.

I suppose it might be because we believe that, somehow, the market is super-efficient. That somehow, the market is all-knowing and that it will correctly incorporated every piece of available information into the price of a stock.

The harsh reality is that the market is not nearly as efficient as you might like to think.

The market can be driven by forces that have very little to do with the available information. Instead it is driven by two even more powerful forces – the forces of fear and greed. When there are more buyers for a particular stock, the price of the stock is likely to rise. When there are more sellers, the price is likely to fall.

The upshot is that the stock market can often be driven by what everyone else just happens to be buying and selling at the time. It is called herd-mentality.

The first rule of investing

This is where smarter, well-informed investors can steal a march on investors who are driven by emotions.

When Warren Buffett mused that the first thing investors should note is to never lose money, he wasn’t trying to be deliberately facetious. He was pointing out one of the most important tenets of investing – to buy stocks when they are below their intrinsic value. That is likely to be your best insurance again losing money.

I have a portfolio of stocks, which I believe are the best picks for me. I know just about everything that I should need to know about those companies. That is because I have owned them for so long. I also reckon I know what they are really worth. In other words, I know their intrinsic values.

Consequently, buying more of those shares when they are priced below their intrinsic value just seems like a sensible thing to do. It is really no different to buying more of those items that you like when they are on offer at the grocer. You can call it whatever you like – I just call it common-sense investing.

This article first appeared in Take Stock Singapore.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore Director David Kuo doesn’t own shares in any companies mentioned.