In my honest and safe opinion, investing in value is one of the best things that has happened with investing in stocks. At least; Benjamin Graham agrees with me. Ask Warren Buffet, I know his opinion will be no different. If your portfolio is going to stand the test of time; I must implore you to find the path of value investing. Before I delve into the benefits of investing in value, let me try a concise explanation of what investing in value means.
Let me give you a list of definitions, perhaps you can identify with the one that most appropriately conveys the meaning to you.
– Investment in value is when an investor invests in a company that trades below its inherent value.
– When an investor specializes in buying stocks that are highly undervalued but have not lost their value.
– Value investors buy stocks whose earning potential is much higher than their current price; That way, they can grow their portfolio to enviable heights over time.
– Investing in value is the strategy of selecting stocks that trade for less than their intrinsic value.
– Value investors believe in buying a stock when the selling price is low and selling when it is high.
Being able to excel in value investments; There are certain fire safe tools that you should become familiar with; they are proven tools that high-value investors have used and continue to use.
Top on the list …
The Price / Earning Ratio: The value investor uses the P / E ratio to quickly determine the value of a stock relative to what a company earns. The value investor believes that the lower the ratio (less than 10), the better the deal.
Strong Fundamentals – The value investor believes that for a business to have a real bargain, the business must have a strong and healthy enough foundation to imply that it is worth more than its asking price. The value investor sees the current price very strongly compared to the intrinsic value and not the historical price.
Current assets vs. Liabilities: The value investor weighs the size of current assets over the liabilities of a company. The value investor is excited when he sees a company whose current assets are twice its current liabilities.
Earning Growth – The value investor believes that a company’s earnings growth should be at least 7% to 10% compounded annually for the past 5 to 10 years.
Earnings per share: EPS is viewed by the value investor as a vital tool that helps estimate the value of a stock compared to the selling price. The highest earnings per share; the better the deal.
Why Value Investors Love Value Investing?
1. Reduce Risk – The risk of a stock underperforming is greatly reduced due to the “guarantee ratios” discussed above.
2. The profit possibilities are great and guaranteed.
3. The power of compound interest
4. Obtaining shares at a discount price.