Value investing Guide from a Value investor

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Value investing is an investment strategy that involves picking stocks that appear to be trading for less than their intrinsic or book value.

A study done by Bankrate found that 52% of Americans don’t own any stock or stock-based investments. Even more alarming, 74% of adults under 30 own no stock at all.

When asked why they didn’t invest in stocks, the market-phobic respondents gave two reasons:

  • They didn’t know enough about stocks
  • They felt stocks were too risky

What is value investing?

Value investing is an investment strategy that involves picking stocks that appear to be trading for less than their intrinsic or book value. 

“Long ago, Ben Graham taught me that price is what you pay; value is what you get. Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down.” – Warren Buffett

The intrinsic value of a share is determined by doing fundamental analysis of the company. Value investing strategy capitalizes on the potential profits by purchasing stocks at low prices. However, these companies have good potential, though they are unpopular and undervalued.

Value investing is among one of the strategies the stock market genius Warren Buffett swears by. Also, there have been various analyses proving value stocks perform better than growth stocks in the long term.

The greater the difference between the intrinsic value and the current stock price, the greater the margin of safety is for value investors looking for investment opportunities. Because not every value stock will turn its business around successfully, that margin of safety is important for value investors to minimize their losses when they’re wrong about a company.

Here we have presented a complete guide on Margin of safety : Margin of Safety in Stock Investing: A Complete Guide

How did value investing get started?

Value investing has evolved over time. Its roots are in the Great Depression and its aftermath, when the strategy’s focus was purely on buying companies whose assets were worth more than the stock traded for. That was largely because many companies were going out of business during the Depression, so opportunities to buy stocks for less than the value of assets had direct implications when a company liquidated.

Since then, though, value investing has grown into more fundamental analysis of a company’s cash flows and earnings. Value investors also look at a company’s competitive advantages to assess whether a stock is deeply discounted.

Why Stocks Become Undervalued?

An undervalued stock is defined as a stock that is selling at a price significantly below what is assumed to be its intrinsic value. For example, if a stock is selling for $50, but it is worth $100 based on predictable future cash flows, then it is an undervalued stock.

Value stocks are generally good bargains, but not all bargain stocks offer good value.

Here is a partial list of reasons a stock may be undervalued:
1. The macro view about a particular industry is poor
2. There is a Severe Short Term Problem which does not damage the business franchise

3. The company has diversified away from its core high-return business

4. The Company is Emerging from Bankruptcy

Does value investing still work?

Value investing Guide from a Value investor

No. Value Investing isn’t outdated but the practitioners of value investing are very few.

Across multiple economic cycles and past crises, value investing has managed to allow investors to capitalize on many opportunities. Considering such a deep track record, it becomes clear that this investment strategy is still capable of remaining relevant even after the COVID-19 pandemic blows over.

We don’t see any reason as to why this type of investing will ever go out of fashion. It will continue to give great results for those who choose to follow it with discipline and patience.

How does value investing work?

The principle behind value investing is – purchase stocks when they are undervalued or on sale, and sell them when they reach their true or intrinsic value, or rise above it. Another condition which value investors follow is allowing for a margin of safety when trading in value investing stocks.

When should I sell my stock?

This is one of the most frequently asked questions I’ve received over the past few months, and is surely a sign that surging stock prices is making a lot of investors edgy.

Here we have presented a complete guide on when to sell a stock : When to sell a stock (The Simplest Way)

So, a lot of people, even long term investors who would buy a business promising to hold on for “at least 10 years”, would sell as soon as the stock multiplies 2-3x.

The basic concept of deep value investing is to purchase a dollar for 40 cents to allow for a margin of safety. Once that margin has eroded and the price of the stock has reached your estimation of intrinsic value it is time to sell.

But always remember this – As long as the business remains great, and you believe in its underlying fundamentals, there is no reason to sell any more than is necessary to rebalance your portfolio.

About the author


Ganesh B Nayak

Ganesh is an Entrepreneur and a Successful Stock Market investor with 5+ years of experience in Finance Industry. Experienced in all aspects of business formation, operation, finance, and management. Ganesh help finance professionals and Fin-tech startups to build an audience and get more paying clients online.

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2 months ago

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2 months ago

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