Continuing on my previous post: The Simple Guide on Investing Pt 1 , today I’ll talk about Value Investing.
It is one of the most valuable investment strategies for the actively engaged investor. Simply put, Value Investing doctrine is based on the concept that companies carry intrinsic value.
You might not be an active investor, and looking to gain a smaller return from a passive strategy — and that’s a perfectly good way to steadily increase your wealth. However, some are also active investors, who put more time in than others when it comes to investing.
Value investing is not for the faint of heart. You will put in a lot of work when considering this approach.
In everyday life you are always making decisions on things which have intrinsic value. For example, regardless of it’s price tag, a piece of jewelry has intrinsic value because of its rare minerals or its cultural importance.
A company with intrinsic value is valuable because of its own internal properties — Not only because of its perceived price in the stock market.
For example, a company can have a solid track record and management team who are dedicated to their mission, but their company’s share value might be really low.
When you look at editorials, most people just talk about the stock price of a company, or the recent ups and downs in the market.
Your approach as a value investor is to pick a company which has a low market price, but has a lot of value internally.
Here are some examples of values which go beyond the share price:
- Does this company have a good track record? Its business units should have a history of completing work on time and budget.
- Does the management team align well to the business’ needs, and succeed in execution?
- Is the company founded on solid technological principle or a good business model which meets the market’s needs?
- Financials: Does the company have solid financial records, or a plan to mitigate financial losses?
There are many more values which you can find in a company. Intrinsic value is ultimately determined by your own judgment. The key principle is that you find value beyond just the share price.
So why look at beyond just the share price?
It’s Simple. The Value Investing strategy means that you look for undervalued companies.
An undervalued company is one where its intrinsic value compensates for its low share price.
See how this goes way beyond the simple adage to “Buy low and sell high”?
Your value investment strategy brings you very close and intimate with the companies which you invest in.
When you buy an undervalued company, you are buying it at a discount. The search for intrinsic value in undervalued companies means that when the company executes and becomes noticed by others, you will have already bought in.
Low valued shares can represent undervalued companies as well as outright failures.
Value investing allows you to filter for low valued companies with great future potential, instead of failed enterprises.
When you buy a low priced company you are giving yourself a large margin of safety. This means that if your undervalued stock pick does indeed fail, you won’t lose that much money anyway.
Don’t Follow the Herd
Successful value investors don’t follow the herd. Value investors often put money into un-sexy companies that nobody else is looking at.
They ignore the latest fads and trends if they merit no intrinsic value. This does not mean that you ignore trends, but that they don’t manipulate your judgment.
Your psychology will be tested often if you are a value investor, and you need to hold your ground. This is why I always advocate to follow principles.
Value Investors don’t buy popular stocks, since they are often overvalued. Instead they invest in obscure companies whose financials are strong or meet that investor’s value criteria.
Additionally as a value investor, you take a second look at household name companies whose prices have stagnated.
Companies that make popular goods and services can recover from low share prices if their fundamentals are solid.
Patience is Key
Because you are investing in a company who has future potential, you must be willing to wait for that future to arrive. Rome wasn’t built overnight, and great businesses take time to flourish.
This investment strategy requires due diligence, and a lot of time. You need to be patient when waiting for returns, as well as researching the business.
Value investing is a proactive strategy that shines light on what stocks really are: a percentage of control in a company — stocks are not just numbers on a screen, or trend-lines on a chart.
The value investor is patient on the valuable but overpriced companies. You must be willing to wait for the share price to lower before you can invest.
To conclude, value investing is not for the faint of heart. Value investing is an intimate process.
It requires you to take responsibility in buying an actual percentage of a company. This includes taking due diligence in researching its management structure, business model, and intimately comparing its as an asset.
Lastly, you as a value investor, will need to ignore the latest fads, analyze undervalued and unpopular companies, and wait for the right time to buy or sell.
Comment below: what type of investor are you and why?