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Understanding and Applying Value Investing Strategy

by dividendinvestor

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What is Value Investing?

Value investing is a Strategy of choosing those shares that are trading at less than their intrinsic value. It can be also defined as value investors actively look out for shares of companies that they believe have been undervalued by the market. Generally it involves buying dividend stocks that are out-of-favor in the market due to investor irrationality and also involves those securities that appear underpriced by some form of fundamental analysis. According to the author “Phil Town”, value investing is all about buying business with discount price. His book helps to know the way to evaluate a company by calculation. By this calculation, investor can get to know about the value of a company and thus he can avoid to buying overpriced stocks. 

Warren Buffett is greatest investors of all time. He has proven that value investing does work. He took the stock of Berkshire Hathaway from $12 a share in 1967 to $70,900 in 2002, thus beating the S&P 500’s performance by about 13.02% on average annually.

Thus it is a corner stone of long-term growth and the investors who practice it, can survive the volatility of the market and are more likely to emerge wealthy than those who speculate in the market.

Advantages of Value Investing –

A value investing strategy is an important strategy for investors. If a value stock doesn’t meet its analyst earnings estimates then the stock price doesn’t usually fall that much. This strategy gives many advantages to the investors such as:

  • With the strategy of value investing, you don’t have to watch the market as often as other strategies.
  • Your approach is based on medium to long-term data.
  • This strategy is based on logic and common sense.
  • A value investing strategy can be combined with some technical analysis to boost returns.
  • This strategy has been a consistently winning strategy since the early 1990s and a good strategy in order to make consistent profits.

How value investing strategy works?

For a value investing, stock screening can be a good initial approach as like other strategies. So industries can be able to analysis to see what we are at, where are we in each of the cycles? Which industries are about to resume an upward trajectory? Which cycles look like they are in the mature stages of bull market?  To look for a value stock to “turnaround”, the company needs a strong balance sheet, plenty of cash in the bank and conservative debt levels.

When the stocks are brought, they should be monitor regularly and keep eye on how the share price is tracking. Read a company’s announcements regarding your stocks as they become available and make sure that they are still on track.

When to sell stocks with value investing strategy?

With the value investing strategy, the investors can sell their stocks in the following situation:

  • Their P/E ratio or any valuation ratio that are using by them is corresponded to fair value.
  • The prospects for the industry change.
  • The fundamentals deteriorate.
  • A value catalyst fails to be effective.

Value Investors look for value –

A value investing doesn’t mean just buying shares in a company where the price is declining and therefore seems “cheap” in price. It is important for value investors to do their research for the company and must be confident that the share is undervalued for some reason.  They should also know about the difference between a value company and a company that simply has a declining price. A value investing is always comparing the current share price to intrinsic value, not to historical share price.

Bottom Line –

So, we can say that value investing is an approach to investing that singles out specific investments; dividend stocks or bonds that are undervalued in relation to similar companies. This investment strategy is not only based on the purchasing good companies at a low price but also holding for the long term.

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