3 Timeless Lessons For Your Investing Success – Part 2

Hey there, welcome to the second part of this series.

Here’s a quick recap: on occasion, my friends would ask me to “teach them about investing”. As such, I decided to organize my thoughts a little bit better and start with three timeless lessons that I feel any new investor can start with.

In the first part, I talked about viewing investing as “buying businesses, not tickers”. Here’s my take on the second maxim to remember:

Price is what you pay, value is what you get

For more on this maxim, I would like to turn to an interesting lesson shared by Professor Aswath Damodaran. The professor hails from the Stern School of Business in New York University and is a well-regarded voice on the subject of valuation, corporate finance, and investment management.

In this session, Damodaran pulled out a simple envelope and carefully showed the audience that he put a $10 note into it.

Upon closing the envelope, he asked the audience on how much they would pay for the envelope. The response from the audience was swift but conclusive: no one would pay would pay anything close to $10 for the contents of the envelope. One cheeky fellow even offered 1 cent for the envelope.

From the reaction from the audience, we may conclude that the audience intuitively understood the value ($10) inside the envelope and adjusted their bids accordingly (less than $10).

While the bids from this audience was logical – unfortunately, the behaviour from the common stock market participant tends to differ greatly. To put this into perspective, the common stock market participant often gets caught up with euphoria of the bid prices offered (share prices) for the $10 in the envelope (value of a business).

Inexplicably, the said stock market participant ends up paying more than $10 for the envelope.

A Fool’s take

The story above may sound intuitive, but in reality, stock market participants can get fixated all too often with share prices and forget about the value of the shares that they are paying for.

As such, to perform well and beat the SPDR STI ETF (SGX: ES3) – a proxy for the market indicator the Straits Times Index (SGX: ^STI) – one key lesson to remember is that daily share prices may not always be the reflection of the value behind the business.

I believe that understanding the maxim of “price is what you pay, and value is what you get” can be the foundation of the next steps in your investing journey: valuing the company, understanding margin of safety and figuring out the right price for the underlying value you see. But above all, there is one more maxim to remember for your investing journey ahead.

Stay tuned for the third part of this series tomorrow.

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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 contributor Chin Hui Leong doesn't own shares in any company mentioned.