What makes investors like Warren Buffet and Benjamin Graham successful in the stock market? Why is it that some people make money in stocks while others don’t? The answer – they follow the simple mantra of investing: buy low, sell high.

Though this mantra is popular amongst stock market investors, the question is how do you define low. What is low? How do you know that the stock price is at the lowest?

To understand that, check if the market price of the stock is lesser than its value. This is because market price is the price the market is ready to pay for the company’s share. The value is the price of the company’s business. Unlike the price of the stock which fluctuates from moment to moment, the value of the company’s business is stable, as the nature of the company’s business doesn’t change very quickly.

When we say buy low, we mean buy the stock when its price is lower than the value. This lets you get quality businesses at bargain prices.

E.g. if the value of the company’s business is Rs 200 and its price is Rs 130, the stock is said to be available cheaply.

It is called as “margin of safety” principle, advocated by Warren Buffet and Benjamin Graham.

In the next part, we’ll see how to calculate the value of the company.