Compensation for this post was provided by Clime Value Investing. Opinions expressed here are my own.
Value investing is one of the simplest stock investment strategies, and also one of the most effective. You don’t even need to be a finance whiz or undergo a course in chart analysis. Value investing strategy means locating quality stocks that are presently undervalued. In other words, if you know the value of something and purchase it at a discounted price, you will get a bargain – and then make a profit.
There are just a few easy fundamentals to master in understanding value investing.
A dollar saved is a dollar earned is a common expression every discerning shopper understands. By educating yourself regarding the intrinsic value of goods you can save a lot of money over time. Buying company stocks is no different. According to demand, the value of a product will fluctuate, although the product itself is unchanged. It makes no sense to pay the full price when you know that a product will be on sale sooner or later.
Company stocks are subject to the same variables. Discounts will arise, but not at predictable times as in the retail market. Educating yourself regarding the intrinsic value of a company is the first step in value investing. Then, when the sale price comes, you will be poised to purchase stocks at bargain prices that other investers are unaware of.
Efficient-Market Hypothesis is not all-knowing
A lot of factors are taken into consideration when constructing an efficient-market hypothesis (EMH). However, markets factor in a bewildering host of indicators that often do more to confuse rather than clarify investment strategies. Some investors who think they have mastered the hypothesis, actually believe that stocks cannot be incorrectly valued due to the abundance of company data available.
Progressive companies such as Clime Value Investing think otherwise. Data is mostly gathered from past performance indicators and doesn’t always reflect present circumstancs – nor can it fully predict investor response to emerging trends. For example, an underpriced stock could be the result of an economic downturn caused by unexpected events or national (or global) recession. Alternatively, an overpriced stock may be the result of excited investors jumping onto an unproven technology bandwagon.
Making margins work for you
A key principle of value investing is to keep a margin of safety. A value investment strategy means your chances of earning a profit on stocks is greater. Also, in the event of a stock not performing to expectations you are less likely to lose money. It’s important to distinguish ‘junk’ or speculative stocks from those with solid foundations where value is expected to rise.
A good rule of thumb for a margin of safety is to buy stocks that are performing at around two-thirds of their actual value, thereby maximising returns while minimising risk on a genuinely deteriorating stock.
Remain patient over the long-term
Value investment isn’t a get rich quick scheme providing instant rewards. Long-term capital gains incur a lower tax than short-term gains, so there is no reason to become impatient. In fact, it could be several years before your stock returns to expected highs. Nor is value investment a guaranteed win on every occasion. Savvy investors understand there will be losses, but it’s the bottom line that counts. Gains that outweigh losses equals profit, and value investment supported by Clime Value Investing professionals is a strategy designed to tip the balance in your favour. Waiting until the time is right to invest is a significant feature of value investing strategy.
Avoiding the herd mentality ensures you don’t jump in and buy overpriced stocks. There is no such thing as a permanently flat line on a stock market chart, and value investors are educated regarding company financials and the expectation of a bounce-back for a company with sound business fundamentals.