“All the real money in investment will have to be made—as most of it has been in the past— not out of buying and selling but out of owning and holding securities, receiving interests and dividends therein, and benefiting from their long-term increases in value.” – Ben Graham, The Intelligent Investor, 1949
“Price fluctuations have only one significant meaning for the true investor. They provide him with an opportunity to buy wisely when prices fall sharply and to sell wisely when they advance a great deal.” – Ben Graham, The Intelligent Investor (1949)
By John Kingham
I started this website in 2007 and since then I’ve written hundreds of articles about value investing and a 300-page book called The Defensive Value Investor.
To be honest it can all get a bit confusing, so I put this page together as an introductory guide to value investing and, in particular, defensive value investing. Hopefully you’ll find it useful.
The basics of investing
Before you can start to invest in individual companies (which is what value investing is all about), you need to know at least a little bit about the basics of investing. This includes basic knowledge of things like how the economy works, how to read company accounts and how to choose a stock broker.
If you’re new to investing then here’s a list of resources which you might find useful:
The basics of defensive value investing
Defensive value investing is designed to help investors build portfolios which are:
- High yield: The overall dividend yield of the portfolio should be higher than the market average (e.g. the FTSE All-Share)
- High growth: Total returns from the portfolio (dividend yield plus capital gains) should exceed the market average over five years or more
- Low risk: The portfolio should be less volatile than the market average and suffer smaller drawdowns over five years or more
- Low effort: The investor should usually only have to make one buy or sell decision (and trade) each month
To achieve those goals, the strategy focuses on building a diverse portfolio of above average companies, purchased and held at below average prices. Those three factors are absolutely central to the strategy, so I’ll explain them in a bit more detail:
- A diverse portfolio: The portfolio should be invested in about 30 companies (or more or less, depending on personal risk tolerance), operating in a wide range of sectors and countries
- Above average companies: Companies in the portfolio should have an above average combination of profitability, growth and consistency, as well as other attractive features like competitive advantages and expanding markets.
- Below average prices: Companies should only be purchased when their price and dividend yield are attractive relative to similar companies and the overall market.
This approach to investing involves quite a bit of analysis, but that’s half the fun. And the task of analysing and selecting companies becomes a lot easier when you leverage the power of computers through tools such as a stock screen or investment spreadsheet.
- Investment spreadsheet, checklist and portfolio tools (free)
- Defensive value stock screen (this is updated daily and takes quite a bit of work to maintain, so it’s only available to paying subscribers)
Defensive value investing in detail
Here’s are a couple of fairly detailed overviews of the defensive value investing strategy contained:
- How to build a high yield low risk portfolio of shares (a 12-step guide)
- Company Review Checklist (this is the actual checklist I use to review companies)
If you want even more detail then here’s a list of blog posts which cover almost every aspect of the strategy.
1. How to analyse a company’s accounts
- How to find shares that pay a reliable dividend
- How to find reliable, profitable dividend growth
- Fast dividend growers – How to find them
- Taking account of Return on Capital Employed
- Related update: The hidden debt of lease liabilities
- Related update: Companies with thin profit margins often make bad investments
- The capital cycle is something every investor should be aware of
- Lessons from a highly cyclical investment
- Measuring leverage
- Related update: Factoring in the risk of excessive corporate debt
- The importance of a strong bank balance sheet
- Debt ratios and pension ratios: Connecting the dots between them
- Defensive shares – An unusual way to value them
2. How to analyse a company’s business
- Value traps – 18 Questions to help you avoid them
- 10 Questions every stock picker needs to ask
- Looking for companies with a durable competitive advantage
- The pros and cons of building an investment story
3. How to build a diverse portfolio
- How to start building a portfolio of shares
- 3 Components of a well-diversified portfolio
- How I’m increasing my focus on defensive sectors
- Why a diversified portfolio is easier to manage than a concentrated one
- 4 Rules for selling shares
Paperback and e-book version
If you want even more detail than the articles above then you should read my book, The Defensive Value Investor:
- View The Defensive Value Investor on the publisher’s website
- View The Defensive Value Investor on Amazon