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.
The concept of value investing was established by David Dodd and Benjamin Graham – they were both professors at Columbia Business School, and taught many well-known investors. Today, value investing is a smart strategy when it comes to investment. Buying low PE ratio stocks, low price-to-cash flow ratio stocks, or low price-to-cook ratio stocks all come under value investing. Famous people in the field of value investing include William J. Ruana, Irving Kahn, Charles Brandes, and 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 is to consider whether the company is buying back shares. Aim for 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 value investing, think of your reasons for investing in the company. Ask yourself what interests you about that company. Think about the company’s current price, profits, management, staff, etc. It’s important to keep your emotions at bay – treat this purely as a business transaction. If the stock seems undervalued, you’ll need to keep away from it.
Fourthly, and lastly, take a moment to think about whether you’d like to own the stock for the next decade or so. Are you willing to buy the shares and keep them for that long a time? If not, then this value investing is not your cup of tea. Here’s a valuable tip – select a good company, when it comes to the initial stake, pay as little as permitted, ensure a reinvestment of dividends – remember that effort and time are required.
Remember that the basic principle of value investing is based on the theory that the market is always disturbed by some fluctuation or the other. Therefore, since the values of equities are constantly changing in different directions, their fundamental values will differ – and thus, some are likely to offer better returns than others. So if you want to be great at value investing, go for shares whose values have fallen (for no apparent reason), and wait for the situation to correct itself.
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