1. What is Value Investing? Video Lecture | Become an Expert: Value Investing - Business Basics

[Music]
welcome the course one unit one lesson
what is value investing in this lesson
we're gonna have three objectives the
first objective is the difference
between value trading and value
investing the difference between an
asset and a liability and created value
investment so to get this started we're
gonna go ahead and go to a person's site
called Kyle McDonald okay so here I am
at Kyle MacDonald's website called one
red paperclip and what he did was he had
an experiment where he started off with
one red paperclip and he wanted to see
if he could trade that up in value and
see what the item was that he could
trade it into so he started off with one
red paperclip and as you look at his
site will click on the next thing that
he traded the paperclip for and as he
was trying to go up in value let's just
say that his paperclip was worth maybe
five cents so he traded up to a fish pen
was the next item so let's just say the
fish pen was worth a dollar so we'll
click and see what he traded the fish
pin for here and he traded the fish pen
for what looks to be a doorknob and so
he kept trading items up up and up and
up and he started off as you look at his
little timeline here with the pictures
you can see where he started off with
the paperclip to the fish pen to the
doorknob to like a Coleman stove and
each item kept progressively getting
more valuable clear up to a house and he
traded all of those items within a year
to a year and a half and something that
he understood was that he he knew with
the value of the next item that he was
trading up up into what it was worth and
so he just took advantage of that and
till he actually owned a home so let's
go to some slides and pick this apart
and see what was actually going on so
this is the big question was Kyle
MacDonald conducting value trading or
value investing since this first lesson
is about value investing you probably
have a pretty good idea of where I'm
going with this and that Kyle was
actually doing what I would call value
trading there's a
pretty big difference between value
investing and value training in my
opinion so let's go ahead and take a
look at this
so okay when he made that trade with the
other person for that fish pen when that
trade happened that fish pen is he held
that and he was waiting to trade that
for the doorknob let's say that that was
over a 10-day period as he was holding
that fish pen
immediately after the trade with the
paperclip that 10 days that he held on
to that fish pendant the fish pen become
more valuable during that time period
during those 10 days that the fish pen
let's just call it let's just say it was
worth $1 over that 10 day period that
the fish pen now become worth a dollar
and 10 cents or let's say he held that
fish pen for a year with the fish pen
then become worth a dollar and 10 cents
or a dollar and 20 cents or would it
still be generally worth $1 not to
include the inflation on it and to
answer that you you'd obviously have to
say that the fish pen did not grow in
value while he held it it just pretty
much stayed exactly the same it didn't
grow in value at all
so that's that's why I would say that
this is value trading opposed to value
investing so as we look at that
difference of that growth while you're
holding the item or the asset you're
gonna find that an asset if you'd hold
an asset throughout that trading period
it would not only hold its value but it
also grow in value put more money in
your pocket so in order to understand
value investing we have to step in here
and figure out what is an asset okay
because the fish pen that's not an asset
that's just an item that's gonna
continue to hold its its value so as we
look at these four items on the screen
you can see in the top left there
there's a house okay what would you say
that that's an asset or not now some
people a lot of people will argue that a
house is an asset I would not argue that
I would say that it's that it is not an
asset it simply maintains its value as
you look at the next
spot over there let's just this is an
apartment building now this is something
that we can consider an asset because
after you buy this this is gonna
continue to put more and more money into
your pocket okay I've put the microwave
in here as a representation of a patent
let's say you had a patent on a part
inside of the microwave so that patent
would be an enormous asset because
you're not really having to pay anything
out in order to possess it unless you
purchase the patent from somebody but
let's say you came up with a patent that
is gonna continue to put money in your
pocket every single month okay in the
last one the car so when you mount a car
its decreasing in value every every year
every month and not only that but you're
making payments on the car every single
month so in the end that's definitely
not an asset and that's something we
would actually call a liability to
summarize when you're talking about NASA
the the simple way to look at it is an
asset is something that's gonna continue
to put more money in your pocket every
single month as you continue to own it
so let's go over here and look at a
liability so there's the car which is
the liability and I'm sure you can think
of many other things in your day-to-day
life that takes money out of your pocket
every single paycheck and that is
definitely something that you can
classify as a liability so assets vs.
liabilities as I said the assets gonna
put money into your pocket the liability
is going to take that money and take it
out so when we're trying to define a
person who's wealthy versus a person
who's not wealthy the wealthy person is
the person who accumulates assets every
month they're doing whatever it takes in
order for them to buy and own and
possess more and more assets so I
obviously use the apartment building
there that they have three apartment
phones but that could be anything you
could the assets could be the apartment
buildings it could be the patent it
could be a small stock which oh that's
what we're really going to be focusing
on throughout this entire website but
each time you own that asset it's
putting more and more money in your
pocket each month so the wealthy and the
rich people they accumulate assets and
they do everything in their power to
minimize their liabilities because
that's what takes the money out of their
pocket
and so the opposite of that would be
necessarily a poor person it could be
whoever but here's a person that has one
asset which is their job and it pays
them you know their salary and it goes
into their pocket and then this person
accumulates liabilities and so they have
the exact opposite thing happening where
they can really never improve their way
of life and their and their social
standing so what is value investing we
talked about value trading with the
paperclip and how Kyle McDonald was
always trading that paperclip up but the
difference between value trading and
value investing is when you value invest
you do exactly what Kyle was doing with
the paper clips but you're doing it with
assets so while you're holding that fish
pen for ten days or a year or whatever
the case would be that fish pen is
actually growing in value and it's
increasing and putting more money in
your pocket as you wait for the next
trade if you even do the next trade the
asset alone might be enough to just keep
putting money in your pocket
so that's really what value vesting is
it's a combination of both of those
things that we just learned about okay
so I'm gonna walk you through a scenario
here so that we can see how Warren
Buffett invests so when Warren Buffett
conducts value investing it would go
something like this
Wow look here's a company called See's
candy I'm going to look at all their
financial information and determine what
I think this company is worth after a
little analysis he determines that the
company is worth $40 a share in an
effort to buy the shares of the company
he looks at what he can buy the shares
for on the stock market so he goes on
his computer and downsizes his game of
bridge and looks at the market price or
a trading price of that company after
reviewing the market price he notices
that the shares are only selling for $30
a share which is $10 less than what he
thought the company was worth per share
wow what a great deal I'm going to buy
some shares of this company had a really
good deal then while I own part of this
great company I'll continue to get paid
for owning this asset in the long run
Buffett purchases the company
and it returns to his intrinsic value of
40 dollars a share and he gets paid
money every month from the sale the
product that the company makes so that's
really what he's doing in a nutshell is
he goes in he could care less what that
company is trading for in the market he
just doesn't care he doesn't even look
at that he goes right to the financial
data he looks at the company and he
figures out what he thinks the company's
worth okay he thinks it's worth $40 a
share and then he goes and looks at what
the company's actually trading trading
for per share so he'd go on and he'd
look and be like oh it's trading for 30
I thought it was worth 40 I think it's a
good business so I'm gonna buy it and he
does and then he holds it and then that
asset continues to pay him month in and
month out all right although Warren
Buffett is a really smart guy he
actually learned two fundamentals of
value investing from his Columbia
professor Benjamin Graham Graham is
often known as the godfather of value
investing and he's written two very
famous books those books are security
analysis and the intelligent investor
both of these books are what Warren
Buffett mostly attributes his investing
knowledge from the problem with both of
these books are they're not entry level
investing books so they're hard to
understand and if you're a beginner it's
not gonna be easy so that's where we
come into the picture the purpose of
this site Buffett's books calm is to
teach you how to invest like Warren
Buffett but what we're really doing is
taking the complex ideas and lessons
from Benjamin Graham's books and
teaching them to you in an
easy-to-understand and interactive
format in the annual learn the elements
of value investing so you can invest
just like Buffett and Benjamin Graham
okay so in this lesson we covered three
course objectives and they were the
difference between value trading and
value investing which we learned we want
to be doing the value investing what the
difference is between an asset and a
liability and we know we want to
accumulate as many assets as possible
and the third was who created and uses
value investing and that was obviously
you Benjamin Graham and Warren Buffett
the key terms that we learned in this
lesson were value investing assets
liabilities and intrinsic value as a
note from the first lesson I want to
highlight that at the bottom of each
lesson page is the location where all
the key McCabe
yep if you click on the term a pop-up
box will appear in the definition for
that term will pop in there if you'd
like to read more on Powell McDonald's
red paperclip story feel free to click
on the link below for his book it'll
take you to him as on if you're
interested in buying that okay so thanks
for watching and I'll see you in the
next lesson
[Music]