| Some of the most successful stock investors | | | | than average luck, or any number of |
| ever have based their investing | | | | unexpected problems occur.So when estimating |
| principals on value investing. Investors such as | | | | the value of a stock, you useconservative |
| Benjamin Graham, Irving Kahn, and | | | | estimates for |
| Warren Buffet, have used value investing to build | | | | earnings etc, to come up with the value. If your |
| vast empires of wealth.Value investing was | | | | estimated value comes in at $10, |
| conceived by Benjamin Graham, and David Dodd, | | | | then you don't buy the stock if its currently |
| in their classic | | | | selling for $9.75, because it's too risky, |
| book, "Security Analysis", written in 1934. | | | | and if your calculations are off, you wont be |
| Although they were talking about stocks, | | | | buying a bargain. If the price is |
| there is still a lot to be learnt from value | | | | currently $6 though, you might buy it, because |
| investing that can be applied to other | | | | you have a $4 margin of safety to |
| investment vehicles. This article will show four | | | | use if you estimated incorrectly.The same |
| things that real-estate investors can | | | | principal applies to real-estate.Suppose you are |
| learn from value investing...1: ***** Investing vs | | | | looking at a deal, and you find you can buy some |
| Speculating *****In value investing, it's important | | | | land for |
| to make the distinction between being an | | | | $100,000 and you can build a 4-bedroom house |
| investor, | | | | on it for $150,000.If new 4-bedroom houses in |
| and being a speculator. In "Security Analysis", it is | | | | the area are selling for $270,000 then should you |
| defined as this:"An investment operation is one | | | | do |
| which, upon thorough analysis promises safety of | | | | the deal? Theoretically, it will only cost you |
| principal and an adequate return. Operations not | | | | $250,000 to buy/build with a sale at |
| meeting these requirements are | | | | $270,000 so you should make $20,000 profit.But |
| speculative".So, there are 3 things needed for | | | | that isn't much margin of safety. What if building |
| something to be an investment: | | | | costs blow out, and it cost |
| - You need to have done thorough analysis. | | | | more than $150,000 to build? What if you can't |
| - You need to be reasonably sure that you won't | | | | sell it straight away so you have |
| lose your money. | | | | some holding costs? What if the other |
| - You need to be reasonably sure that you will | | | | 4-bedroom houses in the area have much |
| make some money.In terms of real-estate, this | | | | better kitchens than you realized, and you can |
| means that just buying and selling real-estate, | | | | actually only sell for $245,000?There are a lot of |
| does | | | | unknowns here, and because your margin of |
| NOT make you an investor. If you're buying | | | | safety is so small, |
| properties at random, just because | | | | unless everything goes right, you can quickly find |
| there is a boom and all property is going up in | | | | yourself making a loss.If on the other hand, |
| value, you are not investing. You are | | | | 4-bedroom houses in the area are selling for |
| speculating.There is nothing wrong with | | | | $350,000 then |
| speculating, you just need to be aware when you | | | | you have a projected profit of $100,000. |
| are | | | | You can afford for a lot of things to go wrong, |
| speculating, versus when you are investing.2: | | | | and you can still make a profit.In the first case, if |
| ***** Value vs Quality *****Value Investing | | | | building costs go up by $50,000, the deal will cost |
| doesn't really have any formulas, or rules. It is | | | | you $30,000.In the second case, because you |
| more of a theory, | | | | have a much larger margin of safety, if building |
| with some general principals. Because of this, | | | | costs go up by $50,000 then you will still make a |
| there are many ways to do value | | | | profit of $50,000.Margin of Safety is a very |
| investing, and different ways to apply it.Benjamin | | | | important concept to all investors, and all real |
| Graham focused on buying stocks significantly | | | | estate |
| below value, with little | | | | investors should think about it if they want to be |
| emphasis in the quality of the stock, in regards | | | | around for the long term.4: ***** The myth of |
| to their long term prospects.This can be a useful | | | | Risk vs reward *****Conventional wisdom says |
| strategy for a real estate investor, particularly | | | | that to increase your reward in investing, you |
| when they are | | | | must |
| first starting out, and need to build up equity | | | | increase |
| fast.Warren Buffet still looks at the value of a | | | | your risk. This is often true, but the Margin of |
| stock, but puts a lot more emphasis on the | | | | Safety principal can turn this around.When margin |
| quality of the stock. He only buys stocks that he | | | | of safety is used, a higher reward actually means |
| thinks have good long term | | | | a lower risk!You can see this is the example |
| prospects, with a bright future in front of | | | | above. The deal that is projected to make |
| them.This is generally a good strategy for | | | | $20,000 |
| real-estate investors to move to later on, when | | | | is quite risky, whereas the deal with a projected |
| they have built up their portfolio. Long term, well | | | | profit of $100,000 is much safer, |
| chosen property will make | | | | because a lot more can go wrong before a loss |
| significantly more capital growth than poorly | | | | is made.This doesn't mean than high reward |
| chosen property, and may be worth | | | | always means lower risk though. The |
| buying even if it can only be bought at market | | | | conventional |
| value.And with commercial real estate investment, | | | | Risk vs Reward wisdom is still correct in general. |
| it may be worth getting a lower rental | | | | So if you borrow more to buy a |
| yield, if this means you can have a high quality | | | | property, your risk and reward have increased. If |
| tennant, who will pay the rent | | | | you buy in a small town to get a |
| reliably. This is a strategy that famous New | | | | higher rental yield, your risk and reward have |
| Zealand commercial real estate investor | | | | increased.This Risk vs Reward theory is only |
| Bob Jones has applied, with great success.3: | | | | incorrect when directly applied to the Margin Of |
| ***** Margin Of Safety ***** | | | | Safety concept. So if you buy something for |
| One of the most important principals in value | | | | $100,000 that all your analysis shows is |
| investing is "margin of safety".Margin of Safety is | | | | worth $200,000, then your reward has gone up, |
| the idea of making sure that you only invest if | | | | while your risk has gone down.Tony John is an |
| your calculations | | | | experienced investor, who specialises in |
| show that there is a significant profit to be made. | | | | Commercial real estate |
| There is no way your analysis can | | | | investment. |
| be 100% accurate, so the margin of safety | | | | Get his free email course now, and find out how |
| gives you a buffer, to use when your | | | | easy it is for YOU to get your first |
| calculations are slightly off, or you get worse | | | | real estate investment. |