What Is Value Investing and Who Is It for?

Many investors who’ve had success in the stock market, including the great Warren Buffet, does value investing. Value investing is becoming a popular method for investing in the stock market. Just like how you will make use of a good personal loan comparison tool, if you’re serious about investing in the stock market and want to make a killing through your investments in the long term, you should consider this practice.

What is value investing?

Simply put, value investing is a method of investing in the stock market that involves buying stock cheaper than its value. For example, you could by stock that is valued at $10 at $5. This often occurs when other investors don’t understand the true value of the stock they have invested in. They therefore sell the stock while it is cheap. This is common when the stock prices fall. Those who practice value investing take advantage of these situations to buy the stock cheap.

Sounds a lot like regular stocks trading, right? Wrong. Regular trading of stock focuses mainly on the price movements of the stocks. Value trading focuses on much more. It is about analyzing the business behind the stocks and not just looking at the price of the stocks. Practitioners of this type of investing will look at the value and potential of the business behind the stocks and buy the stocks based on the information they get.

Value investing is done with a long term outlook. The investors often employ a buy and hold strategy. They will wait for the value of their investments to play out before selling.

Why is value investing successful?

Value investing works mostly because the price of the stocks often don’t reflect the true potential or value of the company that is selling its stock on the market. In most cases, people who practice value investing shy away from stocks that are overpriced even if the business behind the stocks is a good one. Their policy in most cases is that a good business with expensive stock is a bad investment.

In many cases, stocks that are considered cheap are not ‘cheap’ when viewed in the long term. Although there is a real risk that the price of the stock may continue to fall, the investor practicing value investing must overlook this trap and therefore not fall into it. You must be willing to go against the crowd and patient enough to wait to see your investment pay out.

Human behavior and the stock market

If you’re interested in value investing, you should be aware of the impact emotions have on the investor’s decisions. This will help you to identify stock that you should invest in. It will also help you to be patient and focus on the long term rather than short term fluctuations in the market.

It is important for investors to understand how fear affects trading on the stock market in order to take advantage of this and buy stocks that people will want to offload quickly at a low price. The understanding of the role of emotions allows you to take advantage of people’s greed and use it to sell your stock when it is overvalued.

It is important for the investor to have a long term view and not be swayed by their emotions. Don’t give in to fear when your stock goes down and don’t be overexcited when the market moves in your favor. You should instead look at the value in the long run. The hard truth about investing in the stock market is that no one knowns what will occur in the future. Focus on the long term and know that you will get your returns in time. If you lack sufficient funds to invest or if you require extra cash for personal reasons, you can find the best personal loan interest rates here.

Making an investment

If you want to be successful at value investing, it is important to be farsighted, i.e. consider the growth of the stocks in 3 to 5 years. You should bear in mind the value of the business. Avoid looking at the current price of the stock. The stocks will rise if the business is truly a good one.

There are four questions you should ask yourself before buying any stock:

  1. What makes a good business? What would you define as a good business? Does this particular business fall into that category?
  2. If you think that the business is good, what makes you think that you should buy the stock despite the person selling it to you?
  3. What would you consider cheap for this particular stock?
  4. Will the stock remain cheap for the long term? Does it have the potential of rising?

Two key factors to remember when evaluating stock include:

  1. Potential of growth of the business

The earning power of a company is dependent on its particular niche market. If the market is highly competitive, e.g. IT products, the company will need to be competitive in order to survive and thrive. If not, they are not likely to survive for the long haul.

It is also important to consider whether the market is saturated or has the potential of becoming saturated. Those companies that survive will be those that offer something extra.

As you search for companies to invest in, be sure to evaluate their competitive advantage and whether they can actively compete and beat the competition.

  1. Low stock price

It doesn’t matter how successful a business is. If the stock is overvalued, it would be a poor investment.  The price is driven super high as a result of investors rushing to buy it because they are hopeful about the future of the stock.

Value investors should strive to buy what other investors want to get rid of quickly. This means that there is bad news about the company that causes investors to sell their stock. As long as the bad news about the company is about temporary damage, the value investor will go in if they believe in the company.

Types of value investors

  1. Investors who buy low and sell high

These are investors who actively seek undervalued stocks and buy them in the hope of selling them when their prices go up. These investors make money by continuously identifying the right stocks to purchase and selling them when their value has increased to a reasonable level.

These investors spend a lot of time learning about companies in order to identify the right companies to invest in. They also practice timing to ensure that they purchase the stock at the right time. They also need to know the right time to sell.

  1. Investors looking for passive income

These are investors that will invest in undervalued stocks from which they can receive regular dividends. These are often older people who want to earn passive income from their investments. These investors must actively seek out companies that pay their shareholders dividends. This is something that not all companies do.

  1. Investors looking for long term investments

These make up a good majority of value investors. They are those investors that will purchase an undervalued stock and hold it. They search for the right company to invest in. This takes a lot of research and analysis.

These investors are not concerned about when they will sell their stock. They are more concerned about which stocks to invest in. They will go for stock in companies they consider ‘good’. They will hold the investment and may even increase their holdings.

Value investing is a great way to build wealth when done the right way. Take the time to learn about the companies you are investing in and the initiative to manage your own investments.