3 Key Issues More Important Than Investment Style: 1) Investing in Good Companies, 2) Buying Good Stocks, and 3) Buying at a Good Price

Recently, with interest rates rising, there's talk that it's time to increase the weight of value stocks. However, in the long run, whether it's growth stocks or value stocks doesn't really matter.

Would truly great investors earn with growth stocks and lose with value stocks? While everyone has their own suitable style, true experts don't blame their tools.In reality, when it comes to stock selection, there are three issues that are more important than style: 1) Buying good companies, 2) Buying good stocks, and 3) Buying at a good price. What's the hidden meaning behind this seemingly simple question and answer? 

1) Good Companies - Ultimately, Growth. 

Simply put, good companies are ultimately companies that grow. And they do so in a sustainable way. So, are companies that don't grow unappealing? Of course.Where does corporate value ultimately come from? From corporate profits. So, for profits to continue to increase, what needs to happen? Sales need to increase, or margins need to improve. To gauge how sales can increase or margins can improve, we look at technological prowess, financial strength, networks, customer loyalty, competitors, and so on.

The capitalist environment we live in, except in extremely rare cases like the Great Depression, is always an inflationary environment. This means that it's natural for the value of nominal currency to decline over time, not something strange. What about the sales and profits that companies earn? Of course, they are nominal values. Therefore, companies that fail to grow cannot protect their own value from inflation. Protect value from inflation? Haven't we heard this before? We invested in stocks to protect our assets from inflation, but the company we invested in isn't growing? The investment was pointless.

However, there are occasional cases where companies that don't grow still hold investment appeal. This comes from the asset value, which is the result of the company's past performance. In such cases, two conditions must be met: 1) The point in time when the asset value is realized must be foreseeable in the near future, and 2) The distribution of the realized asset value must be fair to all shareholders. How do you know about number 2? It comes from good management, which is discussed later in the good stock section. 

2) Good Stocks - Ultimately, Management. 

Some investors might think that point 2 is the same as point 1. However, unfortunately, there are cases where a company is good but its stock is not. This is quite common on the Korean stock market. Why? Because the management is bad. In what way? In that they don't respect the value of minority shareholders.

When you buy stocks, you become the owner of the company, so you should look at it with the mindset of a business owner and invest, we've heard that many times. However, this only applies when the business partner you trust is a good person. We've all heard stories about successful businesspeople who lost a significant fortune and ruined their lives due to betrayal by a business partner they trusted. It might seem like this only happens in business, but it's the same with stock investing.Remember that becoming a minority shareholder means entrusting your capital to the majority shareholder. 

3) Good Price - Ultimately, Valuation. But this is the hardest part. 

Point 3 is probably the easiest to understand.What is a good price? The cheaper you buy, the better. But the problem is? There's a high chance you'll just end up twiddling your thumbs while waiting.In reality, valuation is one of the most difficult issues for individual investors. Even for institutional investors who think about this every day, valuation is always a tough issue.And in most cases, the answer isn't something we determine, but rather something given to us by the market, so individual investors should be more flexible in their approach rather than setting overly strict standards. 

I'll buy at a P/E of 10 times this year's earnings and sell at a P/E of 15 times the earnings in the year after next. Therefore, the purchase price will be this much, and the selling price will be this much. This plan might seem perfect at first glance, but it's actually very difficult to execute. Especially, it's not easy to predict this year's earnings and the earnings in the year after next. Trying to determine the upper and lower bounds of valuation is even more difficult. Since everyone finds it hard, the common benchmarks are 1) past figures or 2) competitor figures. However, even if you use 1) the past average as a benchmark, if you don't know which cycle your investment period falls into, the standard deviation increases, making it meaningless. 2) In the case of competitor figures, if I fail, my competitors also fail, and if I improve, my competitors also improve, so it's difficult to consider them independent variables. So, what's the conclusion? Valuation is inherently difficult, so let's not be too picky.