What Is Value Investing Strategy?

 

We often heard about stock trading, stocks market, buy low sell high, high-risk high return, low-risk low return, but we seldom heard about the stocks market through Value Investing.

Value investing is not trading stocks, do not be a daily stocks trader, that’s the job for brokers but we should be a Value Investor, we do not trade stocks DAILY by looking at the stock market news and the up and down charts, do not trade stocks base on financial advisers or brokers’ advice.

Instead of doing all the above, we learn to be a value investor.

 

1. What Is Value Investing?

Value investing is a method that choosing the good and profitable stocks that are listed in the market for less than their current intrinsic or book value. It means the stock price is cheaper than the actual overall business values. Value investors that we want to be is to be able to actively filter and screen out stocks that is being underestimated.

As the economy and market overreacted most of the time on a daily basis to the general big and small news and reflecting in the stock price movements. Which, it not direct impact on a company’s long term fundamentals in the long run. Huge volume of tradings that overreacted by the market up and down, that opens up opportunities for us to be able to have a position in the stock market by purchasing stocks at the discounted prices. Isn’t that what we always do? It is to do shopping when it’s on SALE.

 

2. How Warren Buffett uses it?

What Is Value Investing Strategy?

Value investing is known to be practiced by Warren Buffett long time ago, some other good investors like Benjamin Graham, professor and mentor of Warren Buffett, David Dodd, Charlie Munger vice chairman of Berkshire Hathaway, Warren Buffett’s right-hand man, Christopher Browne (Graham student), and billionaire hedge-fund manager, Seth Klarman.

Buffett and Graham both are known using Value Investing Strategy, they constantly looking for undervalued stocks (stocks that on sale) that have good cash flows, good fundamentals, have economic moats, sustainable competitive advantages such as brand name, network effects, or switching costs.

Economic Moats play an important role, as Buffett prefers to understand the business when he invests, companies like Coca-Cola, insurance, banking companies like Wells Fargo, and he also looks into sectors like healthcare, industrial and energy.

 

Warren Buffett – “It is much better to buy a wonderful company at a fair price than a fair company at a wonderful price,”

 

Economic Moats simply is what we can related to in our daily life. Observation of human behaviors, what they often use, purchase and consume. For example, Coca-Cola, a well-known brand that being tied-up with Mcdonald’s, famous fast-food chain, these two giants are most average customers would likely choose, over brands that they’ve seldom heard of.

Warren Buffett recommends investing only in industries you have personally worked in, or whose consumer goods you are familiar with, like cars, clothes, appliances, and food.

 

3. How Value Investing Works?

Why women are better investors than men? Simply because women are better at finding goods with high values but only buy them when the price has come down. That’s the happiest moment when the sales is on.

The simple concept of value investing is pretty much the same. If we know the actual value of something that we thirst to have, the same time we can save a lot of money, and that’s the happiest moment when we buy it during sales period.

Value investing works similarly, regardless of how often the company’s stock price can go up and down but the intrinsic value of the business should always remain the same. The stock market affecting by the economy demand and causing fluctuations, what we believe it’s good doesn’t change the way we invest through our due diligence.

Often times, stock markets go on sale usually is unannounced. Unfortunately, nobody is able to predict when it will come nor when it will be ending. As value investors, the more we practice, the more we know where to find more information to support the fact that when buying them at a discount price. Continue doing it for the long-term 10 to 20 years and be patient, we will be able to grow our money exponentially.

 

4. Intrinsic Value

What Is Value Investing Strategy?When is the discounted price? How cheap is cheap? When shares are undervalued? Investors use various metrics to evaluate the intrinsic value of a stock.

They started with doing financial analysis such as going through the fundamental of a company, their financial status, yearly revenue, earnings per share, how healthy is their cash flow, as well as the brand research, business model, competitive advantage and who is their target market.

 

It might sound a very tedious process for all of us, but if you think of Mcdonald’s, Coke-cola and Starbucks again, they are just part of our daily life. It is not difficult at all to understand their business. No matter what economic situation we are at, we still consume the same fast food and coffee. That’s the basic knowledge or general information that we need to obtain.

 

There are various metrics you can use that include:

  • Price-to-book (P/B) or the investors call it book value, which measures the value of a company’s assets and comparing them to the stock price. If the price is lower than the value of the assets, the stock is undervalued especially when the company is not dealing with financial hardship.

 

  • Price-to-earnings (P/E) ratio is the ratio of a company’s stock price to the company’s earnings per share, it is used to find out whether they are overvalued or undervalued.

 

  • Free Cash Flow, cash that is generated from the business after the costs of expenditures and operation costs have been deducted. Remaining cash is the free cash flow that will be used to invest in other business, acquisition, and expansions, clear the bank debt or any kind of debt, pay dividends to the shareholders and issue share buybacks from shareholders.

 

5. Don’t Follow The Hearsay

What Is Value Investing Strategy?Most of the time people invest irrationally, buying in when the market is doing well, selling in fear when the market is going down, they simply just have no patience to wait for the stock price to do up again in the long run.

So instead of wait for it so come back up, they rather take certain losses by selling it. Unfortunately, enormous investors behaving this way causes the market having excessive movements.

Value investors don’t follow the herd. When many are buying in (hopeful), they are often exiting the market or not doing anything. When everyone is selling (fearful), they are buying and keeping whatever stocks that they have for long term investment.

Regardless of what’s on the news, what are the people saying, only focus on the company fundamental, the hidden part of the iceberg.

6. Diversifying

After 6 years of value investing in the stock market, it was not an all-time-winning investment. I made the aforementioned mistakes in 2016 by putting many eggs in the same basket, acted based on hearsay. I lost a big chunk of money that I had made in the past 2 years, fortunately, I was able to keep my initial capital.

What Is Value Investing Strategy?The following year I restart again and make back my course fee again and slowly growing year by year. The learning curve, learning from mistakes is necessary. Situations make us a wiser investor.

Diversification is important to protect your portfolio. Owning multiple stocks, from different indexes, variety of companies even explore into different sectors is a better way to safeguard your money.

So that if anything happens to a certain index or specific industry, only 1 part of your portfolio is affected. Investment manager Christopher H. Browne recommends owning 10 stocks in his book, value investor Benjamin Graham suggested 10 to 30 companies are enough to create a diversified portfolio.

 

7. Observe Your Emotions

What Is Value Investing Strategy?It is hard for you to imagine now how our emotions will affect the way we invest. Until when you have taken actions and you have real money in the stock market, and all the stocks are high in price and your money is growing.

You will encounter a dilemma whether to keep holding it or to take the profit and sell them.

Vice versa, when the market is down, all running numbers are red on your screens, you will feel anxious, worry, even you might not sleep well at night. All these will happen to all of us and it is normal.

This is the time we all should observe how we feel, and perhaps read this blog again and again. Why being a long term value investor is important, diversification is mandatory, not to be herd-mentality investors.

 

 

8. Long-term Investors are The Winners

Warren Buffett once said, “I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years.”

What Is Value Investing Strategy?According to the past track records, those who bought the stocks 10 years ago, and leave it there, doing nothing fancy, made the most profit. They only sell it when they need the money for retirement, otherwise, the periodical up and down is cyclical.

 

 

 

 

Takeaways:

  • Value investing: Choosing the good and profitable stocks listed in the market for less than their current intrinsic or book value.
  • Economic moats, do what you can understand
  • Metrics to find out value stocks include: Price-to-book (P/B), Price-to-earnings (P/E) ratio, Free Cash Flow
  • Don’t follow the hearsay
  • Diversification
  • Observe your emotions
  • Be a long-term value investor

 

If you need more guidance and courses to help check out more here. Do leave me some comments and feel free to discuss further more!

 

 

14 Comments

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  • Wow! You have done full detailed analysis into what value investing strategy is. The goal is to buy it low from the usual normal price and sell it high above its normal price it at he normal value. Considering the way Buffet does it, going long term with  the stocks before cashing in or the getting the dividends on them. To be honest, value investing strategy is the best possible kind of investing and you have broken it to understandable bits for anyone to understand. Thanks.
    i will surely bookmark this because I know it would be of great value to me soon

    • Great that my post has help you a certain extent.Perhaps more people can do value investing to grow our wealth, make our money to work hard and beat the inflation in the long run. Glad that you like the info.

  • Great article on value investing. That’s the method that got me started into the stock market as well. I really like Warren Buffett’s way of thinking with this strategy. Benjamin Graham certainly has gotten a lot of things right too. In fact, my favorite book on investing is The Intelligent Investor by Benjamin Graham. It’s a great book on value investing. My favorite quote about value investing is that “Behind every single stock, there is a company” and that stocks aren’t just symbols with prices that go up and down. Way too many people think about stocks like gambling. Putting money in and hoping some comes out; but really it is investing into a company. One can win in the stock market with the right knowledge and research, and this is a great post detailing the beginnings.

    • Ya totally agree. When most people think the stock market is too risky, most likely they betting on the company. It’s always better to know what we buy and why we buy, the risk has cut down a lot if not at least half. I came across the same book too from Graham. Love it. Hopefully the post explain well and more people can gain more knowledge about the stock market and make some money. thanks for dropping by.

  • Thank you for this informative post.  I’m actually on a financial rebuild if you will; just paid off $30k in debt, started savings and money market accounts and am looking at some very basic, low-investment, angel investing just for fun.

    I am unfamiliar with value investing but it’s seems intriguing.  That said, I’m a man so maybe finding the best deal/sale will be more difficult for me.

    Is there a group or company you’d recommend to purchase and manage value investments for me?

    Thanks again,

         Scott

    • HI Scott, there are a lot of finance companies can claim that they are good in handling our money for us, but the problem is they always ended up as scams. I not saying all are, but most of the time if we park money for someone else to manage our money for us, is not their money, when they lose our money, who care the most? We are. We will label them as a scam when our money is not coming back. I suggest to learn all kind of investment by ourselves, and manage our own money. Nobody else will care more. Thus, in the future please invest diligently! All the best!

  • Value investing sounds really good. A friend has told me about value investing and from you have penned, I believe it to be a very good way to make good money from the stocks. This strategy according to what I have learnt here is buying sticks that have great potential but are priced low and so when their prices go back high,that’s where the profit ones in. It is a very good investing idea honestly and I want to give it a try. I want to learn more on this investing so I’m getting to that course

    • Hi John, the course will definitely help you to gain more knowledge about value investing! All the best! thanks for dropping by!

  • The value investing strategy is a really great  strategy that has been effective in the industry over the years, thus this review is really important and helpful. I have always heard about this strategy but haven’t had enough knowledge on it. I’m grateful for this post for carefully listing and explaining the 7 metrics well to my understanding. I’m grateful for this value adding review and I hope to see more of it.

  • I’ve heard many good things about value investing and Warren Buffet. He seems like he’s a master at this sort of thing. Placing value on item not knowing if it will have value in the future can be a risky venture. But I like how you have explained it in this post. 

    I would like to be able to purchase shares, but find they are really tough for a laymen person like me to figure out. What are you placing value on right now? Where do you see the stock going up?

    • HI Jagi, thanks for dropping by. Like I mentioned in the post, it is only risky when we don’t know about the company and if we are trading for short term gain. I can’t speculate the stock market trend now, but I’m confident on stocks like MCD, SBUX, V, NKE, KO and DIS. These are the very strong fundamental stocks, strong business model, and sustainable during economy crisis and pick up fast after crisis 🙂 We don’t have to invest in companies that is new, we can always look into the companies with past 10 years financial record. Hope ti helps!

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