In the marketplace, there are companies that are often undervalued therefore

investors buy these companies and sell them off once the market prices go higher,
that is what we refer to as value investing. This process doesn’t come easily since
there are strategies used to make it quite simple. Value investing strategy relies on
finding companies that trade for less than they are worth. This manner projects to
seek for market inefficiencies and taking advantage of what the general market
sentiment is.

Value investing is not about buying companies that are not worth much and
expecting to reap huge from them, it’s actually quite the opposite. It’s advisable to
buy a good company at a fair price than to buy a fair company at a fair price. The
value investor is not only looking to reap a quick buck on the market trend but
investing in companies that have great underlying business models.

A strategy that is long-term is important for value investing. Do not be tempted by

short-term factors such as daily fluctuation of prices or volatility, a good company will
pay even on a bad market day. One thing to keep in mind is how the cash flow is
operating, is it generating profits from the business operations and what is its
potential to grow.

Instructions In Using Value Investment Strategies

The notion behind a value investment strategy is very simple. You ought to find
companies that are trading below their real intrinsic value the undervalued stocks in
the market. Investors who choose to use this strategy believe that the market reacts
to both good and bad news, which usually triggers fluctuations in the prices of
companies which does not, in the end, correspond to the company’s long-term actual
value.
When such scenarios happen, short-term investors have a temporary opportunity to
make profits while the long-term investors wait for the market to correct its error in
valuation, which in the end benefits them more than the short-term traders.

Taking A Look At The Intrinsic Value

First and foremost, the value investing entrepreneur will determine the intrinsic value
right from the fundamentals. The meaning of intrinsic value, and how it is calculated,
is different from one investor to another. Some investors usually consider the future
cash flows, while others opt to put the focus on a particular financial situation at that
given time. That decision will be based on your style of investment as well as the
holding period. Whichever is chosen, you will require the intrinsic value price or the
company’s worth without a need of any premium.
Long-Term View

Value investing usually entails dealing with the long-term due to the fact that you
need to wait for the changes in price or maybe opting for a buy-in point approach. All
this could take quite a long time. In case there is nothing you find to fit your criteria, it
is wise to avoid buying anything first. If you happen to have a strict criterion, you
could end up having periods of “no buying” at all. Value investing in another way also
tends to look at a low turnover in the portfolio, since it takes some time for stocks to
increase in value from the time of buy-in point.

Contrary at Most Times

Since value investing rarely follows the herd mentality. It often adheres to the flavor
of contrarianism. In actual fact, it often goes in opposition to the herd, which is a
common expectation. In value investing, and among many investors, the market
usually overreacts at times. Overreactions on the higher side should be a good
reason to keep off the stock, and overreactions on the lower side should make you
buy the stock. These two decisions are directly and always opposed to the trends in
the market.

Always Endeavor to Look for Value, And Not Junk

As a value investor, you should always look for stocks that hold strong fundamentals
which include dividends, earnings, cash flow, and book value. They should also
happen to sell at a discount, depending on their quality. To clarify this, a wise value
investor ought not to buy stocks on a basis of “cheapness”; these stocks should be
selling at a certain bargain price which is relative to the fundamentals.

Consider the following example: Take an assumption of a Company X and a

Company Y happen to have been trading at around $35 per share during the last one
year. Then the share price for the two companies drops suddenly to $15 per share.
Does this imply that the two stocks are now selling at a bargain? It does not
necessarily mean that. Taking a closer look portrays that Company A could have
been backed by a well-respected management team, as well as some strong
fundamentals. On the other hand, the Company B could have been plagued by poor
earnings and maybe a weak leadership. With this kind of information, It is clear that
Company A could be an ideal stock to be considered by value investors, as the
strong fundamentals indicate the drop in price is most likely temporary. However,
Company B is not good for the value investors due to its poor fundamentals and
weak leadership. Company B gives a warning to value investors that it’s headed to
even lower share prices and it is also not a bargain.
Buy the Company, and Not the Stock

It is very important to note that most value investors look at buying a stock as a
means of becoming a company owner. To many value investors, profits are usually
made through investing in any quality company, not through trading. Due to the fact
that the method they use relies on determining the worthiness of the underlying
asset, these value investors often fail to pay attention to external factors that affect a
company. These factors include daily price fluctuations and market volatility. These
factors are assumed not to have any long-term effect on the value of the business,
and they are in most cases ignored in favor of the less effective fundamentals.

What You Need to Look For

Try as much to find value stocks that trade on any stock exchange such as the NYSE
and Nasdaq, including any sector such as utilities, financials, energy, consumer
discretionary, industrials, healthcare, technology, real estate, telecom, or even
materials. There are some general guidelines for you to include as part of your “value
investing strategy” is to look for companies with the following:

• A share price that is not more than two-thirds of the intrinsic value. For Instance, if
the intrinsic value happens to be $30, share price ought to be higher than $20.

• A low ratio in price to earnings. The ratio of price-earnings usually measures a

company’s share price relative to its earnings-per-share. Its calculation is done by
dividing the earnings per share to the market value per share. A good rule of thumb
that value investors should look for stocks with a P/E which is less than 40%, of the
stock’s biggest P/E for the last five years.

• A low ratio of price to book value -This compares the value of stock’s market to its
book value. It is calculated by dividing the latest quarter’s book value to the current
closing price. Value investors should seek companies with price to book ratios which
fall below the industry averages.

• A low ratio of earnings to growth - This is used for determining a particular stock’s
value, and at the same time considering the growth earnings of the company.

• A low ratio of debt to equity – It measures the financial leverage of a company and
is usually calculated by dividing a company’s liabilities by the stockholders’ equity.
Debt to equity ratio needs only be used for comparing companies that are within a
similar industry, since a relatively high ratio may be the normal scenario in one
industry, and a low debt to equity ratio may be common in another industry.

• A dividend yield which is at the least two-thirds of a “long-term” AAA bond yield.
Consider the following example: If the AAA bond yield for a particular company is
4.63%, the dividend yield of the company should be greater than 3.27%.

• Growth earnings of more than 7%. Declining earnings of more than 5% should not
appear for more than two consecutive years during a ten year period.

Consider The Margin of Safety

Last but definitely not least, successful value investing usually depends on the
determination of an accurate intrinsic value. This is something that could be tricky.
Whether you would be figuring out this number by yourself or using an online
resource like the Reuters or MorningStar.com, it’s a wise idea to provide yourself with
a margin of safety. For instance, if you are very confident that a particular company’s
intrinsic value is $35 per share, you may use $31 per share when doing your
analysis. In this way, if the intrinsic value of the stock is lower than your estimate, the
margin of safety could help keep you from making a huge payment for the stock.

Benefits of Value Investing Strategy.

If you are searching for secure, steady returns, low-risk investments that deliver long-
term results I recommend observing a value investing strategy. The following are
benefits you are likely to reap from a value investment strategy:

• It Doesn’t Require You To Be A Rocket Scientist

The strategies for value investing principles are very straightforward. They include
holding your stocks over a long-term period, buying with safety margins and buying
undervalued stocks with an economic moat as well. Contrary to what people believe,
intelligence doesn’t make one a great investor, being a great investor is
predominantly attributed to the level of patience one has, the ability to read, the
willingness to learn and the attitude involved.
• No Room For Emotions Is Left.

The one big mistake investors make is to make crucial decisions with their emotions
involved, which leads to their downfall. Following your gut feeling rather than the
actual data figures in the market. An investor should learn to differentiate between
the two. Value investing does away with emotions from the equation by solely relying
on the data gathered via the fundamental analysis process. Purchasing shares in a
strong business with high potential growth will deliver very positive results regardless
of the dips it takes in the short term period.

• The Proof Is In The Pudding

Historically and over long-term, global markets have grown tremendously. They,
however, experience their ups and downs for this is natural and normal and there is
nothing one can do about it. If you flash out the waves of fluctuation, you will finally
end up growing your wealth.
For instance, in the 20th century, the United stated went through two world wars and
other expensive and traumatic military conflicts but still, the Dow rose from 66 to
11,497.

• Compounding Interest

Learning how to take advantage of compound interest is yet another great benefit of
value investing. Through reinvesting your dividends and returns, your investments
will grow tremendously. You are assured of gaining interest upon interests. As time
goes by you will be able to realize the difference reinvesting your returns has on the
growth of your portfolio.

• Assured Rest

Investing in the long-term strategy reduces your worry about how your portfolio is
performing. Purchasing and holding stocks take off the pressure of sudden market
troughs and peaks. With this value investing strategy you rest assured that you shall
make money over the long term without any disruptions.
• It Is Easy To Correct Your Investment Mistakes

Normally, value investors invest with a margin of safety in line because the stock
market offers no guarantee. Regardless of the research, we make; we are humans
and therefore we are prone to make mistakes. Investors do understand this very well,
and to be on the safer side they prepare for the worst by investing a safety margin. In
case you make a mistake in calculations you need not worry since that can be
corrected without making huge losses.

• Avoiding The Tax Man

As an investor do you want to avoid paying investment fees? Then you need to
continually stay in the market because holding your assets incurs no taxes or fees
and in the real sense, it actually reduces your tax rate. Keep in mind that if you want
to benefit from a reduced tax rate on your profits, then it’s advisable that you hold
your assets for more than a year. This will prevent the tax man from knocking at your
door every now and then like they do to the short-term traders.

• Commissions Are On The Afterthought

Investment activity is an expensive affair. You shall find that the more you purchase
and sell the higher your fees will accumulate. Value Investors who hold their assets
and keep trades at a minimum level, having to pay commissions does not have a
great effect on the performance of their portfolios. By running a low level of activity
you avoid the risk of outweighing your profits with unnecessary fees.

• Less Volatility

Any value investor who chooses to time the market uses a wrong strategy that no
investor should risk using because this is a kin to gambling. Timing the market will
lead an investor to miss out on overall financial goals and valuable gains.
 Disclaimer

Futures, forex, stock, and options trading are not appropriate for all traders. There is a substantial
risk of loss associated with trading these markets. Losses can and will occur. No system or
methodology has ever been developed that can ensure returns or against losses. No representation or
implication is being made that using any of these methodologies or systems will generate returns or
ensure against losses.

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