The value investing philosophy was pioneered by Benjamin Graham and has been popularly put to great use by Warren Buffett (who needs no introduction). The core ideas behind this philosophy can be summarised as follows:<ul><li>Price does not always equal value</li><li>The price you pay for something is only relevant in relation to its value</li><li>The essence of value investing is to purchase shares of a company at a price that is substantially lower than the company’s underlying value.</li></ul>

Understanding The Value Investing Philosophy 

Margin of safety represents the difference between a company’s stock price and the company’s value.When the stock price of the company falls sufficiently below the intrinsic value, it creates a buying opportunity. Value investors expect that over time, as others recognize the true value of the company, its share price will climb toward its intrinsic value. As this happens, the margin of safety shrinks. When the share price equals or exceeds the company’s intrinsic value, the margin of safety has disappeared and the shares should be sold.

Margin of Safety  

Growth investing and value investing have more in common than apart, the major difference lies in the emphasis on “margin of safety”.

Comparisons With Growth Investing

Growth and Value investing are joined at the hip.

Benjamin graham defines an investment operation as “one which, upon thorough analysis, promises safety of principal and an adequate return.”Based on this definition, there are three components to investing:<ul><li>Thorough analysis,</li><li>Safety of principal</li><li>Adequate return.</li></ul>Any operations not meeting these requirements according to Graham should be considered speculative.

Value Investing Vs Speculating

On paper, the logic of value investing may appear obvious: buy stocks at a bargain price and sell them after the price has gone up. However investment decisions are not that straightforward, an investor is subject to an ever-changing environment where logic can be overshadowed by emotion.It takes a great deal of conviction to stick to value-investment disciplines, especially when a company’s stock price declines after you purchase its shares.This is why value investor’s trade long-term (3-5 years).Value investing principles are therefore mostly unappealing unless the investor has large bucks.

Criticisms of Value Investing  

This ideas explain the basic elements of value investing philosophy.

Prices in themselves are not appropriate determinants of value, this is one of the core principles of value investing and after examining this idea thorougly, you'll see this principle cannot be denied. Consider this example If I went to a store and got two items one for $40 and the other for $90 dollars. You…

Value Investing: The Philosophy That Gets you Investing like Warren Buffett

Inflation is the gradual loss of purchasing power over time, reflected in a broad rise in prices for goods and services. In other words, you can buy less today with the same amount of money as you could a while back. For example, in the 1970s, the average cup of coffee cost 25 cents. By 2019, it had climbed to $1.59.   Inflation isn't limited to price spikes for any single item or service. It refers to increases in prices across a sector such as retail and, ultimately, a country's economy.

Inflation

Inflation in a healthy economy is typically in the range of two percentage points. Inflation can stimulate spending and encourage demand and productivity when it is within range. But when inflation surpasses wage growth, it can be a warning sign of a struggling economy.

A healthy economy

Households lose purchasing power when the prices increase for items such as food, utilities and gasoline. Companies lose purchasing power when prices increase for inputs used in production. In response, companies typically raise the prices of their products or services to offset inflation, meaning consumers absorb price increases.

How inflation affects consumers and companies

Statistical agencies measure inflation by determining the current value of a “basket” of various household goods and services. This is referred o as a price index.  Agencies compare the value of the index over one period to another, such as month-to-month for a monthly rate of inflation or year-to-year for an annual rate of inflation.

How inflation is measured

<ul><li>Demand-pull inflation occurs when the economy's demand for goods and services exceeds its ability to produce them.</li><li>Cost-push inflation occurs when the rising price of input goods and services increases the price of final goods and services.</li></ul>

The main causes of inflation

<ul><li>Post World War II, price controls, supply problems and extraordinary demand caused double-digit inflation.  It peaked at 20 percent in 1947 and subsided at the end of the decade. </li><li>The mid-1960s to the early 1980s saw some of the highest inflation rates, with a peak of 14.8 percent in 1980. In turn, interest rates jumped to nearly 20 percent. </li><li>In January 2022, inflation in the United States increased to 7.5 percent, its highest level since February 1982, due to soaring energy costs, labour mismatches, and supply disruptions. </li></ul>

Historical inflation

During inflation, companies usually pay more for input materials. To maintain gross margins, companies raise prices for consumers. However, if price increases are not executed carefully, companies can damage customer relationships, depress sales, and hurt margins.  But done right, recovering the cost of inflation on a case-by-case basis can strengthen relationships and overall margins.

How inflation affects pricing

<ol><li>Adjust discounting and promotions and revisit other aspects of sales inapplicable to the base price.</li><li>Develop the art and science of price change. Don’t make across-the-board price changes but tailor pricing actions.</li><li>Accelerate decision-making by establishing an inflation council that can act quickly on customer feedback.</li><li>Plan options beyond pricing to reduce costs.</li><li>Track execution relentlessly.</li></ol>

Five steps companies can take to adapt to inflation

Deflation occurs when the overall level of prices in an economy declines and the purchasing power increase. It can be driven by growth in productivity and the abundance of goods and services, a decrease in demand, or a decline in the supply of money and credit. Generally, moderate deflation enables consumers to purchase more with less money. But deflation can also signify a weakening economy and lead to recessions and depressions. In addition, during deflation, debt becomes more expensive.

Deflation

Stashed ideas

What is inflation?

Cash transactions were already on the decline in 2019 as consumers switched to electronic payments. The pandemic exacerbated this as retailers and consumers turned to online shopping or contact-free card and app transactions.When people did make the rare cash purchase, they were more likely to keep their change than use it in a subsequent transaction.The US Coin Task Force, formed specifically to address the issue, reported in May 2021 that much of the nation’s $48.5B in coins were sitting in America’s 128m households.

The MIssing Change

In 2021, the Mint produced 14.5B coins, and is on pace to produce another 13B this year, Todd Martin, deputy chief of corporate communications for the US Mint, told The Hustle.But new coins typically account for less than 20% of coins in circulation each year.And because the majority of coins still circulate through the economy via transactions and coin recycling, the Coin Task Force is urging consumers to do their part to “get coin moving.” The action plan is to:<ul><li>Using exact change when making a purchase.</li><li>Exchanging change at banks or kiosks.</li></ul>

Minting More Coins

Where are all the quarters for the laundry machines? Sitting in people’s houses, apparently.

Where the heck is all our change? - The Hustle

Most countries have a central bank that manages the money supply. It is independent of the government to prevent political interference. The government can implement different types of economic policy, like decreasing taxes, but can't increase the money supply.

The government can't just increase the money supply

The central bank determines how much money is in circulation at a time. They can authorise the printing of unlimited money to help an economy in crisis, but that's a short-term solution. It doesn't necessarily help with economic growth in the long term and can actually hurt the economy.

The central bank 

When there is more money in circulation, the manufacturers of goods like food, clothing, and cars could respond to demand simply by raising prices. This means you could no longer buy as much with the same amount of money. It is known as inflation. Inflation of about 2% a year is considered a sign of economic health, but more can quickly damage the economy.

In recent decades, central banks have tried quantitative easing to infuse the economy with cash while maintaining a low risk of severe inflation. The quantitative easing approach is where a central bank increases cash flow by purchasing another entity's bonds. Anyone can buy bonds from corporations or governments. When you buy a bond, you're really loaning money to the company or government, who will pay it back later with interest.<ul><li>When a person buys a bond, they're using money already in circulation.</li><li>When a central bank buys a bond, it creates cash.</li></ul>

Quantitative easing

During the 2008/9 financial crisis and 2020, the United States' central bank bought unlimited bonds from the U.S. government called treasury bonds, loaning the U.S. government money. The government used the money to fund relief efforts. This isn't the same as printing money. Because of the way bonds are priced, the Federal Reserve effectively lowered the return on them. This incentivises other investors to lend to riskier entities, which should help companies to borrow money to use in projects, growing the economy over time.

Buying bonds from the government

When the Federal Reserve pledged to buy unlimited government debt, this means the government could just issue more bonds which the central bank would buy. The government could then use the money from the new bonds to pay off the old bonds, meaning the government never pays back its debt. Some economists say that when a central bank buys government debt, it's a subversion of a system designed to protect the economy. Others insist that these measures help stabilise economies.

Concerns over central banks buying government debt

Explore the economic strategy of quantitative easing, where a central bank purchases bonds in order to boost the economy. -- In March 2020, the COVID-19 pandemic rocked economies worldwide. Millions of people lost their jobs, and many businesses struggled to survive or shut down. Governments responded with some of the largest economic relief packages in history— the US alone spent $2.2 trillion on a first round of relief. So where did all this money come from? Jonathan Smith explores the strategy of quantitative easing. Lesson by Jonathan Smith, directed by Serin İnan, Kozmonot Animation Studio. Support Our Non-Profit Mission ---------------------------------------------- Support us on Patreon: http://bit.ly/TEDEdPatreon Check out our merch: http://bit.ly/TEDEDShop ---------------------------------------------- Connect With Us ---------------------------------------------- Sign up for our newsletter: http://bit.ly/TEDEdNewsletter Follow us on Facebook: http://bit.ly/TEDEdFacebook Find us on Twitter: http://bit.ly/TEDEdTwitter Peep us on Instagram: http://bit.ly/TEDEdInstagram ---------------------------------------------- Keep Learning ---------------------------------------------- View full lesson: https://ed.ted.com/lessons/how-do-governments-create-money-out-of-thin-air-jonathan-smith Dig deeper with additional resources: https://ed.ted.com/lessons/how-do-governments-create-money-out-of-thin-air-jonathan-smith#digdeeper Animator's website: https://www.kozmonot.tv ---------------------------------------------- Thank you so much to our patrons for your support! Without you this video would not be possible! Nathan Giusti, Helen Lee, Anthony Benedict, Karthik Balsubramanian, John Hong, Annastasshia Ames, Amy Lopez, Vinh-Thuy Nguyen, Liz Candee, Kathryn Vacha, Ugur Doga Sezgin, Anthony Arcis, Chung Wah Gnapp, Karmi Nguyen, Yelena Baykova, Harshita Jagdish Sahijwani, Nick Johnson, Carlos H. Costa, Roberto Patrick, Les Howard, Jennifer Kurkoski, Ryan B Harvey, Abhishek Bansal, Akinola Emmanuel, Jose Arcadio Valdes Franco, Karl Laius, JY Kang, Heidi Stolt, Alexis Hevia, Christina Salvatore, Karlee Finch, Michael Goldberg, Denise A Pitts, Doug Henry, Kristiyan Bonev, Keven Webb, Mihai Sandu, Deepak Iyer, Javid Gozalov, Kyanta Yap, Rebecca Reineke, William Biersdorf, Patricia Alves Panagides, Valeria Sloan Vasquez, Yvette Mocete, Cyrus Garay, Samuel Barbas, Brighteagle, LadyGeek and Curtis Light.

Why can’t governments print an unlimited amount of money? - Jonathan Smith

Money market mutual funds are convenient for individual investors and big institutions to keep money temporarily. However, their yields have been very low for years. The Federal Reserve has begun to increase the short-term interest rate it controls, and money market fund yields available to consumers have started to rise. They will climb as long as the Fed increases short-term rates. But the yield on the average big money market funds is still only roughly 0.6 percent. Considering the rate of inflation running at 8.6 percent annual rate in May 2022, that is a negative rate of return.

Money market mutual funds 

Money market mutual funds receive the reverse repurchase agreement, a.k.a. the reverse repo rate, for funds held by the Fed overnight, so it functions as a rough floor on yields. That rate stands at 0.8 percent. It was close to zero for many months.  At the moment, short-term Treasury bills, with yields in the 0.85 - 1.05 percent range, provide a practical ceiling for funds that hold government securities. If the operating expenses of money market funds exceed the income they bring in, the funds could theoretically pay negative yields.

The role of the Fed

in the current unsettled markets, many people need good places to keep their short-term cash. Money market funds could work, but with some qualifications.<ul><li>Another place for holding short-term money safely includes U.S. government bonds, which yield 9.62 percent. There are penalties if you cash them in before five years.</li><li>Bank accounts are very safe, even if the interest most pay is on average just 0.07 percent.</li><li>The Vanguard Federal Money Market Fund has a yield of 0.72 percent.</li><li>The T. Rowe Price Cash Reserves Fund is close at 0.66 percent.</li><li>The Fidelity Money Market Fund has a yield of 0.60 percent.</li></ul>

A place for cash

The yields are still very low. They don’t keep up with inflation, and if they eventually do, that’s probably not good news either.  Even if the Federal Reserve manages to reduce the rate of inflation close to its 2 percent target rate, it will slow the economy, perhaps tipping it into a recession. If the slowdown is evident, the Fed is likely to start cutting rates, creating an opportunity for nimble money market fund managers to beat inflation by a small amount.  While money market fund yields are improving, as an investment they remain a bad idea.

When rates fall again

At last, interest rates for money market funds have started to rise. But inflation means that in real terms, you’re still losing money.

Value Investing: The Philosophy That Gets you Investing like Warren Buffett

What is inflation?

Where the heck is all our change? - The Hustle

Why can’t governments print an unlimited amount of money? - Jonathan Smith

How Inflation May Change Where You Put Your Cash

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