value usually is difficult to find
You can find a Low Pe stock but the company will operate in commodities
It’s like searching for a similar size property in central Mumbai with money you get from property you sell in Bhiwandi
Most who search for value assume because Pe is low there is value not realising they might be buying a property in Bhiwandi after comparing properties in central Mumbai.
So you go through thousands of 2 beds in central Mumbai and they are selling for upward of 5 crore. One day you visit Bhiwandi and find a property for 50 lakhs and lo and behold you have found great value
Ofcourse you can buy 10, 2 bed properties in Bhiwandi so you assume you get a bigger value for your money
The problem is when the market crashes
Recent Brexit ongoing property collapse has not touched prime central London properties - the ones that are around Buckingham palace. Those around London and further into suburbs are back to 2008 prices. This is observed everywhere not just uk and Brexit when a market crashes a property with right “location location location” does not fall
Back to Bhiwandi:
Let’s say the government decides to build a direct train link from Bhiwandi to central Mumbai cutting travel time to 30mins with trains every 10 minutes. Now you have value. Even if prices crash you are sure that once the train link is up you will atleast get your capital you put.
Pe will start getting high and if you have done basic research say check schools around the area, local markets, place of religious worship, communal mix (balance sheet) your investment is likely to be safe.
At this stage even if you pay double the Pe it will still have a margin of safety even if everyone says Pe is high.
At some point prices will exceed or be nearer to central Mumbai prices and that is time to sell.
That is margin of safety.
Not the cigar butt margin of safety. Cigar butt margin of safety are extremely difficult to find in a mature market. I think even Graham found it difficult to find these companies towards later part following the recovery after the crash
Most people assume a commodity stock has a chance of 5 pc growth and Pe is low so have found a great value stock not realising there is really no margin of safety