Value investing is the secret to long-term growth. The ones who can learn about it will be more adept at handling the fluctuations of the market than those who cannot pick up this skill. The basic characteristic of value investing is that it involves buying securities ? the shares of which seem under-priced by basic analysis. In fact, the essence of value investing may be said to be purchasing stocks at a value that is less than their intrinsic value.
David Dodd and Benjamin Graham ?both distinguished professors at Columbia Business School, established the concept of value investing. They were responsible for instructing many well-known investors. Today, it?s clear that when it comes to investment, value investing is a brainy strategy. Buying low PE ratio stocks, low price-to-cash flow ratio stocks, or low price-to-cook ratio stocks all come under value investing. Renowned people in the industry of value investing include William J. Ruana, Irving Kahn, Charles Brandes, and of course, Warren Buffet, who is probably the most famous among them.
When it comes to value investing, there are four certain basic tips that one can follow. The first is to look at the price or value of the entire company, and not just the current share price. Market capitalization is the cost of buying the whole company, and the market capitalization test will tell you if you are paying extra for a stock. One can also estimate the cost of a stock through the price to earnings ratio ? as this gives a decent standard for comparison for other value investing opportunities.
The second tip – observe ? is the company buying back shares? Ideally, you should have a management that tries to reduce the number of outstanding shares, if the other uses of capital are not value for money ? this will make each investor?s stake in the company bigger. Third, in the field of value investing, consider your advantages for investing in the company. Think about the aspects that interest you, and don?t forget to observe the current price, profits, management, staff, etc. Also, treat this as a business transaction ? don?t get emotionally attached to the company, keep your feeling in check. Does the stock seem undervalued? Then keep away from it.
The fourth and last tip – are you prepared to own the stock for the next decade or so? Do you think you can keep them for that long a time? If your answer is in the negative, then this value investing is not for you. Lay emphasis on selecting a good company, and when it comes to the initial stake, pay as little as you can. Attempt to ensure a reinvestment of dividends ? and of course, put in maximum time and effort, these will stand you in good stead.
Remember that the essential theory of value investing is based on the conjecture that in the market, there will always be some kind of fluctuation or disturbance. So since the values of equities are constantly in flux, and going in different directions, their fundamental values will differ. This means that some are likely to give better returns than others. So, in value investing, opt for shares whose values have fallen (for no clear reason), and wait for the situation to rectify itself.
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