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Why Value Investing Works?

If you’ve ever thought about value investing, you may be wondering if it’s right for you. Before you judge value investing though, it’s important to understand what it is.

What is Value Investing?

The premise of value investing is pretty simple. You don’t need to have an extensive background in finance (although if you understand the basics it will help), but you do need patience, common sense, some money to invest, and some time to do some reading and accounting.

It’s important to understand that each company has an intrinsic value. Stocks are currently changing, and just like when you buy a new laptop, they’ll sometimes be priced higher, and sometimes “on sale”. While this changes the price of the laptop (or stock), it doesn’t change what you’re getting.

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Value investing is basically the theory that it makes no sense to pay full price for that laptop, but instead to wait until it goes on sale. This means buying stocks when they’re priced very low. It gives you a better chance of earning a profit when you decide to sell them later on.

The father of value investing, Benjamin Graham, would only buy stocks when they were priced at two-thirds or less of their value. He felt that this was the necessary margin of safety that would give him the best returns.

It’s important to recognise that successful value investors are usually doing the opposite of most other investors. While everyone else is buying, they’re usually selling, or waiting, and when everyone else is selling, they’ll usually be buying.

While value investors won’t buy the most popular stocks, they will invest in companies that aren’t yet household names, or those that are popular and their stocks have plummeted. One thing that’s important to note is that good value investors don’t think about the current value of the stock, they’re thinking long-term, and realise that they’re buying stock for what it is-a percentage of ownership in a company.

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Why Value Investing Works?

It’s important to note that value investing isn’t about buying the cheapest stocks, but about finding ones that have been undervalued by the market. This shows that it will eventually rise, and you’ll enjoy a nice little profit.

These lower priced stocks will often be overlooked because most investors prefer “glamour growth stocks”. This basically means that investors prefer to stick to companies with a reputation, than one that has been undervalued or is new.

Value investing takes a great deal of patience, and it definitely won’t provide instant gratification. It will often take years before the stock investments pay off, and you’ll need to take a long-term approach, and be prepared to lose some money in the short term.

If you’re prepared to devote some time to research, value investing can be an excellent way to get started in investment opportunities, and one of the best ways to invest. For more information, be sure to talk to Clime Value Investing, who can help you with all your investment needs.

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