I was watching Arsenal vs Newcastle on Sunday. Andy Carroll won the game for Newcastle after soaring above all the Arsenal defenders to head the ball into the net. My brother, who is an avid Newcastle fan and who was sitting beside me, told me that Andy Carroll came from the youth ranks of Newcastle and made it into the first team when he was 17. Currently, he is 21. I thought, “For him to make it into the first team at such an young age, he should have caught the eyes of the manager and performed very well on the field”. At the moment, he is one of the rising strikers of the Barclays Premier League. I’m sure if he’s consistent in his performance for the next few years, he will be so hot that bigger clubs will be willing to pay lots of money for him. That was what happened to Theirry Henry, Cristiano Ronaldo, Wayne Rooney and the likes.
Value investing is just like looking for rising players in the soccer arena. In value investing, we look for fundamentally strong companies that are undervalued and have a strong balance sheet, free cash flow generation, wide economic moat and are run by managers who are competent and honest. After having found them, we buy these companies at a price lesser than the intrinsic value. Having bought it at depressed prices (just like the promising soccer players), we let the company grow consistently yearly and sell it off to other people when the stock rises to exorbitant prices (just like how clubs are willing to pay a world record of 80 million pounds for a player).