What is value investing and how do you do it? How does it differ from day trading, growth investing, and income investing? What are its basic principles? Learn all of that and more in this article.
Known geniuses who use this strategy
Meet Warren Buffet, the best value investor in the world. He invented it. Kind of. Currently, he has $103 Billion. That’s all made from the stock exchange. So, if you still think the stock exchange is bad, think again. If you fear the stock market, you just need to learn better how to do it safely and profitably. This guy did just that and look how it paid off.
What is value investing?
This is a strategy that focuses on buying great companies well below their actual price. It focuses on holding a stock long-term, unaffected by fear, the news, or market fluctuations.
Of all the investing strategies known today, this one is the most tried and true of them all.
Value investing reduces your risk because you know what companies to buy.
What is a value stock? A value stock is a stock, which is priced below what it should really cost. People who use the strategy make buying decisions based on the intrinsic value of a company, and not on a news article or another investor’s decisions.
You have to invest in well-established companies that have shown great potential for growth over time. You need a deep understanding of those companies.
The 4 M’s of Value Investing
You understand what the business is all about. You will do the research into the details that affect its intrinsic value
The leaders in charge of the company have shown signs of integrity and proven success from decisions they have made before. You believe they will lead the company upwards.
The company has something unique that separates it and protects it from the competition. You know they won’t be easily replaced by the next guy.
Margin of safety
You are sure you are buying this company at least below 50% of its real value.
Before you invest in a company, check the 4 M’s. The Margin of safety is what truly makes your investment a value investment.
5 key rules for successful value investors
- Focus on the long term.
This is a buy-and-hold strategy. Once you identify an underpriced company, it takes time for the market to correct itself and the price to grow.
- Don’t fall prey to fear. Fear is your friend. It can make others sell too early and too cheap, so you can buy at a lower price. Value investors decide when to buy based on a company’s intrinsic value, not on the fear in the stock market.
- Be patient
If the company you want is not undervalued right now, that doesn’t mean it won’t become undervalued in the future. Be ready to wait.
- Do your research
True value investing requires research. You need to research the pros and cons of their industry, their management, their finances, and more. The more you research, the better returns you will get.
- Invest with your values
If you don’t know what companies to support with your money, think of what companies you use in your daily life. These are the companies you know and love.
Let us know in the comments what is your favorite investment strategy.