Value investment investment on yield cyclical investment

Value Investment

Value investing is a method which requires great patience.Value investment is not suggested for get rich overnight investors.Primary focus of value investing is to identify shares of those companies traded at a much discounted rate compared to the asset of the company.

It can also apply to a company whose share rating is below those of comparable companies in the same sector.Basically shares of these companies are bought at cheap price and sell them when the market has woken up to their underlying value and their share rating mostly matches their asset value .

For many investors value investing appears to be boring.It takes dedication and single mindedness to identify undervalued companies and although you may have the belief that the market will eventually rerate the shares, there is no guarantee as to when this will happen .It's truly a philosophical approach to investment and utilizes assumptions.

Value of a companies' share can be directly related to a true value for the company.This value can be calculated by examining its financial figures using the fundamental analysis.

There are various ways in which share prices can be valued using financial figures.We can consider a number of financial ratios that do indeed offer a method of valuing the company.They rely on published reports and accounts,and link the companies financial figures to its share price.They include price-earning ratio,dividend yield and divedent cover ,net asset value and net current asset value and discounted cash flow.These measures certainly provide a financial check for the company and produce a common yard stick to enable different companies to be compared .

However, valuing some companies on fundamental is hard because they may not produce figures that allow us to adopt traditional valuations. For example a technology company may have yet to produce a profit and is unlikely to pay a dividend for many years if at all.

The assumption that over a time a companies share price will tend to move towards the companies underlying value can be harder to swallow than the assumption than the assumption that its possible to work out an accurate valuation of the company.

Second point when it comes to value investing is shares are priced in the market as result of supply and demand.

Value investing appears to work best in a falling market when valuations are generally low .Final conclusion is that when you have identified your value stock and invested keep being invested until you get your targeted returns.

Investing On Yield

One comfort for value investors is that they patiently wait for the market to wake up to the value of their shares and produce a profit for them they are likely to be enjoying an income from the dividend of the shares.The amount that share pays in divedent relative to the price of the share is called the yield and this can often be a healthy sum compared with the saving rate available in a building society.

Companies may return a high percentage of their profits in the form of a dividend because of the type of the business they are.For Example utility companies such as electricity and water business often generate a lot of cash and because they do not need to reinvest great sums and their earning growth is slow but steady ,they tend to pay large dividends relative to their share prices.

A company may appear to offer investors a good yield ,but since yield is an historic measure based on the last total dividend payed , a high yield could indicate that the market expects company to cut its dividend .But some companies provide a high yield simply because their share prices had fallen,possibly because company is out of favor with investors , and as a result historic and forecasted dividends are higher in relation to the share prices.As long as the forecasted divedends is likely to be comfortably smaller than the companies earnings ,from which it makes the pay out,such companies can be attractive to the investors.It could be that share prices are comparatively weak and buying the shares make sense on value investing grounds.If this is the case ,then while you patiently wait for the market to rerate the shares you can enjoy the income from them.

Michael o Higgins in his book BEATING THE DOW published in 1991 developed a strategy called the dogs of the dow based on the US Dow jones industrial Average index of 30 leading US shares.His basic technique involved investing the same amount of money in the ten highest yielding shares in the index and holding them for a year.Because the DJIA is made up of just 30 blue chip companies the theory suggest that these shares are the highest yielder s because they have fallen out of favor and are therefore dogs of the index hence the name .

After a year the theory indicates that you should recalculate the ten highest yielding stocks in the portfolio and sell any of your original ten shares that are no longer in the list and reinvesting the proceeds in the shares that are now in the list.This technique would deliver greater returns than investing in the index as a whole .