Breaking News
0
Ad-Free Version. Upgrade your Investing.com experience. Save up to 40% More details

How To Profit From Value Investing

By MarketBeat.com (Chris Markoch )Market OverviewJun 14, 2021 07:50AM ET
www.investing.com/analysis/how-to-profit-from-value-investing-200585957
How To Profit From Value Investing
By MarketBeat.com (Chris Markoch )   |  Jun 14, 2021 07:50AM ET
Saved. See Saved Items.
This article has already been saved in your Saved Items
 

Simply put, value investing is an investment strategy in which investors look to buy stocks that are on sale. However, that is an oversimplification. Value investors are looking for that are trading below their intrinsic value.

This is an important concept to understand. Intrinsic value is what the company is really worth, which can be very different from what the stock price shows.

And while that price discovery may take awhile, value investors know that over time, the market is highly efficient. Good stocks will reach their true value at some point.

In this article we’ll help explain value investing and offer tips on how to profit from this strategy.

How to Identify Value Stocks

Value stocks share many (but not necessarily all) of these characteristics:

  • They are companies that are in a mature phase of its business cycle
  • They offer steady growth
  • They have reliable revenues and earnings
  • They may pay a dividend

How Does Value Investing Differ From Growth Investing?

Both investing strategies require levels of discipline and commitment. However value investors are looking exclusively at stocks that are trading below their intrinsic value. Overvalued stocks are not a consideration. Growth investors on the other hand are content to “ride the wave” if they find a stock that meets their growth objectives.

Tesla (NASDAQ:TSLA) stock is a good illustration of the difference between growth investing and value investing. In 2020, TSLA stock was being driven “to the moon” as the saying goes. But the rally forward was largely being driven by investor sentiment. Fundamentally there was no reason to believe that Tesla stock was worth what it was.

Here are some strategies that can help make you a better value investor:

Don’t Confuse Price With Value

Price is what you pay for something; value is what it’s worth. This is important for value investors to remember because frequently there are good reasons that a stock is heavily discounted.

The "meme stock” trade of 2021 is an illustration of buying on price alone. However, in many cases, an inexpensive stock is inexpensive for a reason. Value investors will dig deep into a company’s financials to see if the low stock price is an opportunity or merely a reflection of the company’s intrinsic value.

Warren Buffett is considered one of the legendary value investors and is attributed with saying, “It's far better to buy a wonderful company at a fair price, than a fair company at a wonderful price.”

Rely on Fundamental Analysis

Every investor needs to know how to use fundamental analysis to perform due diligence. Successful value investors will look at fundamental analysis metrics like price-to-earnings or price-to-book ratios. However, the difference between a value investor and a growth investor is that a value investor will walk away from a stock that is showing itself to be trading at or above its intrinsic value. That would not meet a value investor’s philosophy to buy stocks that are on sale.

Know What You Own

In the context of value investing, know what you own means understanding what sector a stock occupies and how that may affect its price. For example, the price/earnings ratio of a tech stock should be analyzed differently with other tech stocks. What may seem to be an overvalued stock in one sector may be an excellent value in another sector.

Put Safety First

Do no harm is an axiom of value investors. The most important guiding principle for value investors is not to lose money. One strategy they use to help preserve capital is by looking for stocks that have an appropriate margin of safety. This means not just looking for a stock that’s selling below its intrinsic value, but a stock that’s trading significantly below its intrinsic value. This gives a stock its maximum upside potential.

Value Stocks Frequently Pay Dividends

Many promising value stock candidates tend to be mature companies. When a company has achieved this phase in its life cycle, there’s less of a need to plow money back into the business. At this time, many companies choose to pass along some of its profits to shareholders by way of a dividend.

However the absence of a dividend does not mean that a stock is not a value stock, but it may have to clear a higher bar for value investors to climb aboard.

The Final Word on Value Investing

Some will say that being a value investor means having a contrarian mindset. I like to say it’s less about being contrarian than being curious. Rather than blindly following the herd or chasing a stock on its way up, a value investor should always wonder why.

Being a value investor also requires patience because once you identify a stock that’s trading below its intrinsic value it can take years for that stock’s price to rise. Being able to buy and hold stocks is an essential part of all value investing.

Original Post

How To Profit From Value Investing
 

Related Articles

How To Profit From Value Investing

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with other users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind:  

  •            Enrich the conversation, don’t trash it.

  •           Stay focused and on track. Only post material that’s relevant to the topic being discussed. 

  •           Be respectful. Even negative opinions can be framed positively and diplomatically. Avoid profanity, slander or personal attacks directed at an author or another user. Racism, sexism and other forms of discrimination will not be tolerated.

  • Use standard writing style. Include punctuation and upper and lower cases. Comments that are written in all caps and contain excessive use of symbols will be removed.
  • NOTE: Spam and/or promotional messages and comments containing links will be removed. Phone numbers, email addresses, links to personal or business websites, Skype/Telegram/WhatsApp etc. addresses (including links to groups) will also be removed; self-promotional material or business-related solicitations or PR (ie, contact me for signals/advice etc.), and/or any other comment that contains personal contact specifcs or advertising will be removed as well. In addition, any of the above-mentioned violations may result in suspension of your account.
  • Doxxing. We do not allow any sharing of private or personal contact or other information about any individual or organization. This will result in immediate suspension of the commentor and his or her account.
  • Don’t monopolize the conversation. We appreciate passion and conviction, but we also strongly believe in giving everyone a chance to air their point of view. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at Investing.com’s discretion.

Write your thoughts here
 
Are you sure you want to delete this chart?
 
Post
Post also to:
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
 
Are you sure you want to delete this chart?
 
Post
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's Investing.com's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.
Continue with Google
or
Sign up with Email