The storybooks are often filled with the stories of underdogs, those underdogs who go on to make breakthroughs in life. But it’s not the storybooks that are only the spectator to such success stories of the dark horses. The stock market is a prima facie part of it too. This is where the concept of value investing comes forth.
Value investing on a common note is a long term investment strategy that focuses on finding the undervalued stocks and purchasing them when they are priced below the intrinsic value of the stock. Everyone would love to be part of this story, where you find undervalued stocks and see it later soar in price in the long run. But how do you go about being a value investor and how do you find the very stocks that are undervalued in a world full of investment strategies and tips. We’ll tell you about it.
Investment Strategies and their Types
The market is filled with plenty of stocks around. Any potential investor is likely to go through plenty of questions the major of which is, ‘which stock is a good one to purchase for’ when opting to invest. Investment strategies are in place to help find an answer to these questions and a myriad of other queries. There are four major investment strategies around in form of passive investing, technical investing, growth investing and value investing.
Passive investing refers to the investment strategy where you invest in a basket of stocks rather than individual stocks, while technical investing is something where you target the stocks that show momentum. Similarly, growth investing takes into consideration those shares that are destined to grow at a fast pace later on. But our major concern is with nitpicking the undervalued shares and finding the basis for future growth in them. This strategy of looking for a fundamentally strong stock trading at a lower price is called value investing.
What is Value Investing?
We all know that the market is dynamic and ever-changing. Stocks tend to fluctuate on the basis of the market trend even though the valuation of the company remains the same. Stocks tend to go through a period of demand, wherein the higher demand creates a high surge in price while the low demand creates a drop-down in price. This is where value investors make their names.
Value investors look for stocks that the stock market is underestimating. The basic concept behind value investing is pretty straightforward. It’s about picking those stocks that appear to be trading on a lower note than what their book value is. They tend to pick these stocks when they are cheap or undervalued and hope to profit from them when they tend to reach their desired levels. Warren Buffet, Benjamin Graham, Seth Klarman, Chandrakant Sampat, Parag Parikh are some of the major names in the value investing world.
Characteristics of Value Investors
We here look at the characteristics and usual practices that a value investor has. These characteristics are a marker of the way how value investors approach the stocks and investing. Read along.
- Lazy to the core: The term ‘lazy’ may seem derogative but it fits quite nicely with value investing. It’s not said that they are lazy but the world perceives them. The reason, value investors rely on deep research and thinking which may seem as if they are doing nothing for the long haul. They don’t get involved in the trading for the benefit of cupping on the short term gains but rather wait, sink deep into the research and look to find the value stocks.
- Contrary to the normal traders: Value traders are motivated with the idea of long term wealth generation rather than short term gains. They look for stocks that have a substantially discounted price and are particularly different from that of herd mentality. They tend to buy stocks when others are selling and keep them aside for the long haul.
- Sound financial interpreter: Value investors are meant to have sound financial skills. They can easily read and interpret financial statements and do mathematical calculations. They have the ability garnered from deep analysis and research to interpret the financial statements and estimate the intrinsic value of the stock. They use these two skills in tandem to find out the best value stocks for investing.
- Biased towards large-cap stocks: If you were to look at the renowned value investors throughout history they have held a close affinity towards the large-cap or blue-chip stocks. The simple reasoning is that these blue-chip stocks tend to the prime stocks and they can withstand the long duration of market fluctuations and rise up again. Most of the value investors look to accumulate more of blue-chip stocks which are undervalued as these can potentially become one of the handsomely rewarding stocks later on.
Understanding the Process of Value Investing
Value investment has an easy to the eye simple process but is equally tough to implement for. We here outline the process of value investing and how they come to find out the value stocks. Let’s check them out.
- It all starts with stock history: History is an important marker in the stock market let alone value investing. Value investors look to find the companies with a long historical trail and seek financial data about them. They tend to analyze and research the data to find out the intrinsic value of the shares of the company and relate it to the current market price. That way, the stocks can be reckoned whether they are undervalued or not. If you were to take the example of Warren Buffet, The Oracle of Omaha, he looks at least 15 years of the data to estimate the intrinsic value of the shares.
- Business fundamental: Another major step after seeking the stock history of the company is the business fundamentals. The idea behind value investing is to look through the financial data to find out the financial health and status of the company. This will help to point out the business entities or companies who have sound health and healthy fundamentals. Value investors mark these companies and seek to invest in the stocks which tend to be undervalued.
- Market valuation: You can talk about the stock history, the business fundamentals, sound financial status and more, but rest assures without the marker for market valuation, it would be of no use. A market valuation is one of the ultimate markers for any company. Having completed the research and analysis to find out the intrinsic value, value investors tend to compare it to the current market price. That will highlight whether the stock is undervalued or overvalued. And rest assured, undervalued stocks tend to go into the portfolio of the value investors.
How to be Stock Savvy like Value Investors?
It’s something that we all tend to think of when it comes to stock investing. The stories of value investors or underdogs making it big in the long run attract all. Everyone’s on the lookout for the ways to become stock savvy like value investors. The answer, down below for you.
- How we tend to buy stocks?: Before looking at the investment ways of value investors we need to first look at our perspective. When we tend to invest in the market, we tend to buy stocks based on the market flow. We tend to pick the popular names and go after them. Such stocks tend to have already peaked in the market and you’re likely to gain a little return when you sell those off. These tend to be overvalued and we tend to go after these without giving a thought to the undervalued ones.
- How Value Investors buy stocks?: Value investors do the in fact opposite of normal investors. They tend to go for the stocks that have taken a beating in the market and are trading at an undervalued price. They understand that even the best of the companies tend to go through the turmoil and may tend to end up performing poorly at the stock market. But these companies have historical backing and a sound financial status which will help them gain traction later on and reach the optimum levels. Value investors tend to invest in these stocks. Their target is not on the companies who are doing well, but who those who will do well in the future.
Value investing is a proposition that may seem easy to the eye and everyone would cherish to be part of the theme. But there are processes, research, and analysis that value investors put in not many see off. Mastering these skills will provide a person with the best shot for value investing. The end result, you’ll tap into great potential that can provide you with greater returns in the long run. Happy Investing!!