The three important principles of successful value investing

There are different ways to label these principles but I shall call them Fundamentals, Valuations and Timing. Buying a successful stock will demand that all three principles are followed, in my opinion.

Fundamentals refers to the inherent characteristics of the investment or stock. That is to say whether the company is a good company and whether it has good growth prospects.

Valuations refers to the cheapness of the investment, or stock. A company may be have all the positive traits, but if it is not cheap, it is not a good investment.

Timing refers to when to buy (and of less importance) when to sell. Needless to say, buying at the wrong time results in very different performance.

To give an example how this can work, let's pick a local stock, say, Singtel. Fundamentals for Singtel looks ok, it has not made any losses for the past 10 years, it has maintained low debts, and management seems prudent and competent. Within its industry, clearly Singtel has the dominant market share in Singapore, regionally subsidiaries of the Singtel group also seem to be doing well and reasonable growth can be expected.

Looking at Valuations, over the past 10yrs Singtel has traded within the range of 10x-30x and currently it is trading at PER of 10x. Not overly cheap but definitely not expensive at all.

Now Timing makes all the difference right? If you had bought Singtel when it listed, you would still be losing money. Of course timing is linked to valuations, at its listing, Singtel might not have passed the valuations part of the test (i.e. at listing it was probably too expensive).

The guru, Mr Buffett does not believe that timing is important. In his view, a good stock should be bought as soon as you identify it, if it goes lower, you should buy even more. In a way, low valuations will take care of timing, i.e. low valuations ensure that you have bought the stock at the right time (and price). Also, according to the guru, once you buy a good stock, you should never sell (this is also called the buy-and-hold strategy) no matter what. Unless you need the money for other purposes.