 |
 |
|
|
Value investmentIn simple terms, value investment is the process of selecting stocks that trade for less than their intrinsic value. A value investor normally selects stocks with lower than average price-to-book or price-to-earning ratios. Of course, it is not nearly this straightforward. Value investing can be defined as the corner stone of long-term growth.
Those who practice it survive the growth and fall of the market and are more likely to emerge wealthy than those who ride the market, in principle, due to the higher quality of the companies falling under the prerequisites of the value investor. Value investment is essentially bothered about getting the most profit at the lowest cost. One can safely say that the basis of value is profit. Value investing is an investment style that more or less suits good stocks at great prices over great stocks at good prices.
It's pivotal to keep in account that value investing is not concerned with how much the price of a stock has risen or fallen necessarily, but rather what is the "intrinsic" or inherent value of the stock, and is it currently trading below that price, i.e. at a discount to it's intrinsic value. The crucial point here is that when looking at stocks that are trading at or above their intrinsic value, the only hope for gaining value is based on future events, since the stock price already represents what the company is worth. Though, when dealing with stocks that are undervalued, or available at a discount, unforeseen circumstances are unimportant in that without any new earnings or additional profits, the shares are already "poised" to return to that inherent value which they have.
The question now, of course crept in "why would stock prices not always reflect the true value of the company and the intrinsic value of its shares" In short, value investment are of the view that share prices are frequently wrong as indicators of the underlying value of the company and its shares. The efficient market theory on the other hand pinpoints that share prices always reflect all available information about a company, and value investors refute this with the idea that investment opportunities are created by disagreements between the actual stock prices, and the calculated intrinsic value of those stocks.
Finding Value Stocks
According to experts value investing is based on the answers to two simple questions:
1. First and foremost what is the actual value of this company
2. Most importantly can its shares be purchased for less than the actual (intrinsic) value
As is pretty much evident, the important point here is, "how is the intrinsic value accurately determined" An important factor is that companies may be undervalued and overvalued regardless of what the overall markets are doing. It is worth mentioning in this regard that every investor should be aware of and prepared for the inherent market volatility, and the simple fact that stock prices will fluctuate, sometimes quite significantly. In an ideal scenario, the quality of the companies targeted by the value investors' screening methods should be, over the long term, less volatile and susceptible to market "panic" than the average stock.
More often than not this is also a two-way road of sorts. On one side, there is no sense in worrying about depressions, upturns, and recoveries due to the underlying quality of the value investments. On the other side of the coin, investments should only be made in companies that can flourish and do well in any market environment. Thats why doing solid investment research and making equally solid investment decisions will take investors much further than trying to forecast the markets.
How Many Different Stocks
In terms of diversification, there are plenty of discrepancies over exactly how many different stocks a solid portfolio should be made up of.
In broader sense value investing is the act of investors selecting stocks based upon a perceived value rather than solely looking at pricing trends in the stocks history.
In fact, in few cases value investing may seem to go against convention investment wisdom in many cases because value investors tend to seek out stocks that they believe the market has undervalued. More often than not this can include so called penny stocks at times, but is more often associated with undervalued stocks on a major exchange such as NASDAQ or the NYSE.
Theoretically speaking value investment strategically and actively seek stocks that trade at low values with the intention of getting out of the investment when the market has corrected what the value investor sees as an error in valuation of the stock.
Value investing needs above average insight and savvy concerning the potential value of a particular companys stock, but it definitely requires a keen sense of perception and skill of research as well.
Fact remained that it is not necessarily riskier than traditional market investing, but does require that the investor be correct about the markets underestimation of a particular company. When the value investor is true, he or she is bound to make a lot of money. On the other hand when they are wrong he or she can be sitting on a worthless or low value stock for a long time.
Value investing is based on the simple concept that the stock market overreacts to both good and bad news regarding companies and the effects of those pieces of information on the potential for a stocks performance.
This assumption on the part of value investors is more often than not correct as the stock market is often full of nervous investors who will pull their investments at a moments notice or the first, smallest signs of trouble.
Considering that Microsoft was once a value investors dream, one can clearly see how value investing can often results in a generous payday for those investors wise enough to see whats coming down the road. A plenty of voices had been thrown regarding the benefit of value investing versus growth investing but fact remained that it depends on your thinking and needs.
Other Articles
|
