With holiday shopping season around the corner, I thought this was a good time to explain how to think like a value investor. Just as consumers are looking for the best deals on clothes or electronics, value investors look for the best stocks to invest in on the market. I will show you how to do it throughout my new series: How to Think Like a Value Investor. For the first article of the series, I will explain the mindset of value investors and show what sets us apart from many other investors. If you have never watched the movie Moneyball I highly recommend watching it as it is one of my favorite movies. It's about a general manager of a Major League Baseball team who used a young economist’s analysis to win games with very limited budget.
As I was re-watching the movie, Moneyball, I realized how it shows the most important concept of a value investment, especially this scene: https://www.youtube.com/watch?v=yGf6LNWY9AI
Here is the quote:
“Billy, this is Chad Bradford. He's a relief pitcher. He is one of the most undervalued players in baseball. His defect is that he throws funny. Nobody in the big leagues cares about him, because he looks funny. This guy could be not just the best pitcher in our bullpen, but one of the most effective relief pitchers in all of baseball. This guy should cost $3 million a year. We can get him for $237,000.”
Quote extracted from here
This is the essence of a value investment. The goal of a value investment is to buy stocks (or any investment) that should cost way more than the current price. Gran Colombia Gold (GCM: TSX) was an example shown in another article. The stock should cost CAD 0.20 - 0.61, but the stock is currently priced at CAD 0.10 (as of November 26, 2016).
For my next article, I will teach you about terminology used in investment.