Is investing successfully a difficult thing to do? Or is it difficult because people make it more difficult than it should be. Let’s revisit the definition of investing by Benjamin Graham, The Father of Value Investing:  "An investment operation is one which, upon thorough analysis promises safety of principal and adequate return. Operations not meeting these requirements are speculative."

The above definition contains 3 sections in regards to a sound investment operation:

 1. Thorough analysis:

Many investors do not do any thorough research. They like to take the easy road such as listening to Jim Cramer’s Mad Money every night and follow his picks blindly. A good investor should focus on the essentials such as:

• Read annual reports and quarterly reports of companies he/she is interested in
• Run stock screen to find list of profitable companies, industries/sectors with strong fundamentals selling at low valuation
• Expand investing knowledge through reading books on value investing
• Scuttle Butt – call companies, competitors, customers, to find out the competitive strength of companies he/she would like to invest in.

2. Safety of principal

Mr. Graham coined the term Margin of Safety which is the concept of buying an asset at big enough discount. Buying $1 for $0.50 or less is always preferable than buying $1 for $2. Investor should approach buying a stock as buying groceries. If you see a very high quality product selling at very low price, you would be tempted to buy, wouldn’t; you?

Investor putting money in any asset need to remember these common rules: 1. Do not lose money. 2. Don’t forget rule no.1. In order to ensure investor minimize the probability of rule no.1 to happen (although it is always possible to happen), he/she should focus on the key things to ensure safety of his/her principal:

• Avoid any companies that one does not understand
• Avoid any companies that have high debt ratios
• Seek companies with high return of equity and low capital expenditures requirement
• Seek companies with strong fundamentals selling at very low valuation (e.g.: price / free cash flow <= 10 helps)
• Never buy a stock/asset at 52-Week High especially if it is at 3-5 Year High

3. Adequate return

Adequate return requires keen understanding of when the situation will change. Any asset selling a very low valuation may still be cheap in the next 5 years or even 10 years if there are no positive catalysts within this time frame. Investors need to understand clearly than adequate return can only be obtained if you correctly assess the future upward potential of the asset you invest in today within a reasonable time period. Time period could be forever if investor had a great buying opportunity that would be impossible to repeat. Investor should focus of the following key elements to ensure they buy cheap for a reason within specific timeframe:

• Assess 1 yr, 3 yr, 5 yr, 10 yr upside potential of assets and industries/sectors (e.g.: if probability is low for any positive catalysts affecting asset valuation for a very long time, the asset price could still be depressed also for a very long time)
• Compare long-term 10 yr, 30 yr government bond yield vs. AAA rated corporate bond yield vs. free cash flow yield of asset (e.g.: why invest in stock yielding 2% (based on average 5 yr free cash flow) if a long-term government bond yields 15% per annum?)
• Be patient since it takes time for a depressed asset to go up to normal valuation. Therefore when one sees opportunities to acquire a position at very low price, depending on the situation, the best way is to build up position gradually in 3 or 4 phases.
• Just as an asset could be too depressed, the same asset could be valued too high later. Hence, in order to maximize return, investors need to buy low & sell high but not too soon.

 Happy Investing!