In my honest and assured opinion, value investing is one of the best things to have happened stock investing. At least; Benjamin Graham agrees with me. Ask Warren Buffet, I know his opinion will not be any different. If your portfolio is going to stand the test if time; I must implore you to look the way of value investing. Before I dig into the pros of value investing, let me attempt a concise explanation of the meaning of the value investing.
Let me give a list of definitions, perhaps you will be able to identify with the one that most appropriately conveys the meaning to you.
– Value investing is when an investor invests in a company trading below its inherent worth.
– When an investor specializes in buying stocks that are grossly undervalued but have not lost their value.
– Value investors buy stocks whose profit potential is far higher than its present price; that way they are able to grow their portfolio to enviable heights over time.
– Value investing is the strategy of selecting stocks that trade for less than their intrinsic value.
– Value investors believe in buying a stock when the selling price is low and sell when it is high.
To be able to excel in value investing; there are certain sure fire tools you must familiarize yourself with; they are tried and tested tools that great value investors have used and are still using.
Top on the list…
The price to earning ratio: The value investor uses P/E ratio to quickly determine the worth of a stock relative to how much a company is earning. The value investor believes the lower the ratio (less than 10) the better the deal.
Strong fundamentals: The value investor believes that for a company to a real bargain, the company must have fundamentals strong and healthy enough to imply that it is worth more than its selling price. The value investor views very strongly current price in comparison to intrinsic value and not to historic price.
Current assets vs. liability: The value investor weighs the size of the current assets over the liability of a company. The value investor is excited when he sees a company whose current asset is twice of current liabilities.
Earnings growth: Value investor believes earnings growth of a company should be al least from 7% – 10% per annum compounded over the last 5 – 10 years.
Earnings per share: The value investor considers EPS as a vital tool that helps estimate the value of a share in comparison ton the selling price. The higher earnings per share; the better the deal.
Why do value investors love value investing?
1. It reduces risk: risk of a share underperformance is greatly reduced because of “guarantee indexes” explained above.
2. Profit possibilities is great and guaranteed
3. The power of compound interest
4. Getting stocks at discounted price.