Before investing, everyone should understand this concept – 03/20/2023 – From Grain to Grain

It is very simple to understand why many fall into financial traps. Most individuals are looking for a tip, for the three assets that you must invest this month, for the way to obtain explosive gains or simply for the investment that provides 3% to 5% per month of extra income. We want what’s easy and fast. You already know that all these promises are just lies, but still, that doubt beats. And if it’s true. Doubt arises because you lack some basic concepts. Today, I’m going to explain one of them.

We usually see characters who get rich quick in movies, or we hear that a friend of a friend made an investment and became a millionaire in a short time. Yes, it’s possible, but unlikely. The growth of the crypto industry has added more dreams to the imagination of investors.

I’m warning you, what I’m going to say is not easy, it’s not simple and it’s not what you’re looking for. However, it’s what you need.

There are three concepts that everyone should strive to learn before investing. The first of these is the concept of asset valuation.

Renowned investor Warren Buffett once said:

Lesson 1: “Price is what you pay, value is what you get”.

On the first page of his book, Investment Evaluation, Damodaran states:

Lesson 2: “Every investment professional knows not to pay more for an asset than it’s worth.”

Does this statement also seem obvious to you?

Let’s face it, no one needed to be famous to say that, right? So, answer the next question.

If the market price is known, what is needed to prevent anyone from making the mistake of paying more for an asset than it is worth?

That’s right. It is necessary to calculate the fair value of the asset.

As Damodaran states at the beginning of the second page of his book:

Lesson 3 “The price of an asset cannot be justified by the simple argument that there are other investors who would pay that price”.

How many times have you seen the price of an asset like stocks, real estate, commodity or crypto asset going up and thought: is it time to buy?

Whenever you have that thought, go back to Lesson 2. Now ask yourself: what is the value of the asset? Is it really bigger than the price? Am I making the mistake shown in Lesson 3?

If you don’t know how to value an asset and decide your investments on your own, you are just playing with your money. It might even work out, like any game.

If you carry a portfolio of stocks, some of them possibly at a loss, and you haven’t done your homework to assess value before investing, you’ve probably missed the three lessons I mentioned. Most of the time, you’re counting on another investor to finally pay the price you paid and thus relieve you of the uncertainty of the game.

Go back to the beginning or ask an expert for help. You need to have a good justification for the value of each asset.

I have taught and performed investment valuation for over two decades. I can say that when you learn the basics, you are already able to get rid of many mistakes in investments.

I learned it working, that is, with co-workers in the management of a bank teaching me. However, it was with Damodaran that the foundations were solidified. You also need a solid foundation.

I’ve already explained some basic valuation concepts in this column. But, you can also learn straight from the source, i.e. with Damodaran, just like I did and for free. His courses are available for free on his University of Nova page at the link.

Good studies!

Michael Viriato is an investment advisor and founding partner of Investor House.

Talk directly to me via email.

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