Hello! Today I have a great guest post from Chris about Value Investing. Chris started a digital marketing business that focused on freelance writing, content marketing, and SEO – while working full time and playing father to two children. You can check his blog – Money Mozart to read more.
Have you thought about that? Entry into the investment gamebut have no idea where to start choosing a strategy? Are you completely overwhelmed by the wealth of options and information?
Then you might want to take a look at one of the best long-term, proven investment strategies – Value investing.
Let us give you a deep insight into this technique, learn more about value investing and find out why you should care about it at all.
Related content to get you started:
What is value investing?
Value investing is a simple concept that includes exactly what the name suggests – buying assets with good value. The trick is to understand what makes an investment “good”.
The stock prices vary daily, regardless of their actual value. This means that the price of a share can be well above its value on some days and well above its value on other days. These stock prices are influenced by many different factors (more on that later), and these fluctuating prices influence most investors to buy and sell with a herd mentality – but not value investors.
Value investing is a calculated, fact-based investment approach. Smart investors who use this strategy know that there are many stocks, bonds and other types of investments that are undervalued and sell far less than they are worth.
Instead of engaging in the emotionally driven practice of buying and selling, a value investor looks at the facts, identifies undervalued stocks, and takes the opportunity to buy them while the price is low. When the value rises, they sell them at a substantial profit.
That may sound like a quick way to make it big, but this process takes time. The price of an undervalued stock does not typically rise overnight, so it can take years to make a profit. However, since it is a strategy based on facts and common sense, it is a medium to low risk investment. Even better, if these prices go up to reflect or exceed actual value, it is worth waiting for the payouts.
Why should a stock be undervalued?
Value investing is about identifying and buying undervalued stocks. But why should shares of a company with strong long-term potential be undervalued at all?
The main reason why a stock could be undervalued can be summed up in one simple word: fear.
When a company is underperforming, investors are afraid. They are concerned that the underperformance is an indication of what will come. If things go on as they are at this moment, the company has no chance of a successful future.
What are you doing? They sell their stocks before the price drops further.
When many investors have this mentality and join this fear, they all sell at the same time, which leads to the price of this stock falling.
During this drop in prices it does appearance Since the company in question is of low value, the share price quoted does not reflect the company’s actual value or future potential. This just means that the company is undervalued at this point.
Of course, the price could have dropped for a number of reasons – this is not always related to underperformance. These factors can include:
The CEO or owner was involved in a viral scandalProduct recallsA low point in the natural business cycleA change in senior management
The possible reasons why a company could be undervalued on any given day are endless. However, taking the opportunity to buy these undervalued stocks has increased the value of your investment.
To better understand this emotional buying and selling trend and how to beat it, let’s take a look at what Value Investing father Benjamin Graham has to say.
Benjamin Graham’s principles of value investing
Have you ever heard of the “Mr. Market concept? It is a well-known metaphor for the stock market, which was created by Benjamin Graham.
In his 1949 book The intelligent investor, Graham created Mr. Market and asked readers to consider him a business partner.
While Mr. Market has everything under control, he can also be a bit unstable. On some days, his perception of value will be perfectly focused and anchored in reason – but on other days? He lets his feelings get the best out of him, either by being far too optimistic and hopeful, or by fear.
These emotions affect Mr. Market’s logic, and on those overly emotional days, his offers to buy and sell additional interest will seem ridiculous. In the metaphor, of course, Mr. Market is the stock exchange itself.
You wouldn’t be led by the emotions of a business partner to believe that the value of your overnight investment would change radically if the facts and reasoning told you otherwise, would you?
Why should you let the stock market do the same?
Do you think Mr. Market lets his emotions determine his price? Then don’t worry about it. The next morning he will be there for you with a new price.
If you look at the stock market this way, you can emotionally separate yourself from the daily ups and downs. You will find that you make informed decisions based on your knowledge, unlike Mr. Market, who makes decisions based on his feelings.
You can choose to buy or sell at a specific time. You never have to do anything just because everyone else does it, even if everyone else includes successful and intelligent people.
Just because one day Mr. Market feels extreme does not mean that the real value of your investment has changed, just that Mr. Market’s mood has changed.
At some point he will be very afraid of the value of his stock and will see that he tries to sell it as soon as possible. Here you identify Mr. Market as undervalued and take the opportunity to buy it yourself.
Then when Mr. Market’s perspective on things changes (as always), you will find him willing and willing to buy this investment back from you for a good portion of your money – far more than you originally paid for it.
How do you do value investing?
Is value investing just a low buy and a high sale? That’s it.
Unfortunately, it’s easier said than done. After all, if it were that easy, everyone would do it.
The key to successfully practicing value investing is knowing the current value of a particular company and predicting its future potential. This data is called the “intrinsic value” of an investment.
A few different factors affect the intrinsic value of an investment, including:
PEG (price-performance ratio)EPS (earnings per share)Expected growthSafety margin
It is not easy to determine the intrinsic value precisely and consistently. If your estimates are correct, you can benefit significantly, but you can lose a lot if you are wrong. That is why it is so important to study past and present and compare this information with market forecasts.
Successful value investors combine this information with Graham’s principles. They put their emotions aside while studying the facts and finding out what the true value of a stock is and how high that value is likely to be months and years later.
Here, value investing differs from simple speculations.
While speculators often throw money at the next big thing and take a big risk as to whether it is a successful investment, value investors take calculated risks based on reason and facts.
If you put your emotions aside, ignore your hopes and fears, and can actively choose to make decisions based on logic and facts, you can make value investing work for you.
Related topics: How to get rich – there are more than millions in the bank
Does value investing still work?
Value investing has been around for almost a century and it won’t go away that quickly.
If you follow the news, you will no doubt hear some outlets saying value investing is dead and discussing how it can never be a profitable strategy for investors again.
However, the simple concept of buying cheap and selling expensive has always proven itself. While different stock market cycles can make it look like a bad strategy, the circle closes and those stocks that were once undervalued are re-valued at (or higher than) their intrinsic value.
Which brings us to our next question …
Is Value Investing Right For You?
The potential to make a lot of money with value investing is there, but that doesn’t mean that it’s right for everyone. Countless investors have fallen in love with the idea of earning Warren Buffet money through value investing to fail miserably.
So how do you know if value investing is the right strategy for you?
First, it’s important to remember that value investing doesn’t make you rich overnight. You have to agree to the long game and have the patience to hold it out. It can take months or even years to make a profit from value investments. That’s why it should be part of your diversified portfolio and not everything.
Before you begin, you need to remember that there is a risk in value investments. Even with the most calculated research, you can still lose. When you make logical decisions and evaluate the facts, you get great success An investment is not guaranteed.
Next, you need to agree to be a lone wolf that doesn’t follow the pack. You need to ignore what everyone else seems to be doing and just follow the steps that you think are right. If you don’t, all of your hard work will be in vain.
After all, you have to consider the most difficult aspect – your emotions. You can never allow your emotions as a value investor to get the best out of you. While many people are beginning to believe that they are, or may be, emotionally detached from their investments, the tables turn quickly when there are large price fluctuations.
It is easy to put yourself in the turmoil of excitement once these prices go up, and it is even easier to feel the fear as they start to fall. Prepare to put these emotions aside before you even start your research.
Then you can start with value investments.
What if value investing is not for you?
If value investing seems too slow for you, you should consider other approaches. Growth investments are, for example, companies whose market capitalization is either less or less mature, but which has enormous growth potential.
I think this strategy is more like gambling personally, so I would recommend something called it instead GARP invests (Growth at a reasonable price). GARP investments seek to strike a balance between value and growth investments by finding companies that have high growth potential but still meet some of the key principles and metrics for value investments.
How do I start with value investing?
Value investing is all about research. To be successful, you cannot start buying until you have thoroughly evaluated the investment and have carefully examined its future potential.
Your research should address a variety of different factors. Don’t take the first opinion you find as a scripture – use your own reasoning and common sense to make a decision.
When You are just startingYou should look at companies in an industry that you know something about and that ideally interest you. You will spend a lot of time looking at the details of these companies so that you can choose an industry that you enjoy, and it feels even more like time well spent.
If you already have industry knowledge, you will get a head start in your research. They are already familiar with the types of products they sell, their business practices, their competitors and the possible costs. If you are new to the industry, you will need to put more time and effort into learning all of this information.
If you become more experienced, you can also get to know other industries.
When choosing a starting point for your research, you can use these points recommended by successful value investor Christopher H. Browne:
Has the company recently increased its prices for its products or services?Has the company found a way to increase profits while reducing expenses?How are the company’s competitors doing?
Of course, you’ll then need to dive into more detailed income reports and future market forecasts to make your final decision.
Is Warren Buffet a value investor?
Warren Buffet is an inspiration for value investors around the world and is probably the most famous example of a value investor you will ever find. Buffet is a very wealthy man who became wealthy due to his success in value investing.
According to ForbesBuffett has a net worth of around $ 76 billion, making him one of the richest men in the world. Value investors have been studying his strategies for years and trying to emulate his success in their own practices.
Similar to Benjamin Graham, Buffet is also very good at breaking down complex financial concepts by turning them into a metaphor that almost everyone can understand.
Buffet is not only an incredibly successful value investor, but is also known for being thrifty – far below his possibilities. He still lives in Omaha, Nebraska, in the same house he bought for $ 31,500 in 1958.
Think of this frugality as another example of emotional detachment from wealth. Buffet isn’t caught up in the heights of buying huge mansions or the world’s most expensive super sports cars, which has allowed him to keep his fortune for decades.
Do you need more inspiration for value investments? Some other well-known value investors are Charlie Munger, Seth Klarman, Christopher H. Browne and Peter Lynch, to name a few.
What do value investors buy?
Unfortunately, there is no simple answer as to what value investors buy and sell at a particular time. If the answer were that simple, there would be a lot more Warren Buffets in the world. Of course, there are some common practices that you can incorporate into your own strategy.
Value investors are certainly watching companies that manufacture products that are in high demand and are likely to be in high demand in the long term. While today’s trends are not always guaranteed to be tomorrow’s trends, every industry has some products that won’t go away so quickly.
These companies are expected to hold significant long-term value and market stability, even if they are undervalued at some point.
Value investing: pack up
When done correctly, value investing is one of the best strategies you can invest your time in. Although it takes a lot of effort and patience, your steps will pay off in the long run based on the knowledge you have, not belief, hope, and fear.
If you separate your emotions from the stock market and know that every stock in your portfolio is there for a good reason, you can be genuinely reassured, which is unusual for the majority of investors.
So what are you waiting for? Start your research and start investing in value today.
Are you interested in value investing? What is your investment strategy?
Subscribe to the free Master Your Money course!
Take the free email course and fFinally, learn how to manage your money better, pay off debt, save more money, and achieve financial freedom. Get our newsletter and get access to the giveaway: