“The only ones to get hurt on a roller coaster are the jumpers.” -Paul Harvey
Since the 1920s, Value investing has been a way of life for a great deal of investors. Similar to contrarian investing, Value investors buy their stocks when they are underappreciated, or on sale, as some may say. Value investors see the intrinsic value of a company, not just the (under) valued stock in front of them at the time of trading.
What is Value Investing?
That’s basically what Value investing is: buying low. Investing when the stock is on sale. The company can be a newer one, with lots of room to grow and showing amounts of potential. On the other hand, the company can be well set and have its place in the market. Either way, the investment is made into a company where the stock price is bound to go up, based on what’s happening behind the scenes.
Value investing calls the investor to look to the overall operation of a business, as all investors should practice in any strategy. They look at past perseverance and growth, present financial handling and money flow, and future potential for growth and advancement. This estimation of intrinsic value can help to identify the margin of safety, and whether or not it’s acceptable at the time. If the intrinsic value is much higher than the stock price, it’s usually the safer way, as there’s more room for growth and less room for loss, if things were to slide downward. This strategy requires a decent amount of analysis, which must continue as one holds.
Stock prices fluctuate for a variety of reasons; good and bad news, market growth causing panic buys and sells, unnoticed/ unadvertised stocks (usually smaller or foreign companies), economic cycles which come in any market (slow and busy seasons), as well as competitor news and moves. It’s good practice to take into account the bigger picture, even if that means diving deep into analyzing your selected stocks 5 main competitors.
It takes time, effort, diligence and patience to see growth when it comes to investing this way. However, the reward is often worth the risk when buying low, if the value goes up that is.
The History of Value Investing
The famous investing strategy has come a long way since its beginnings, but keeps the same strategy, in essence. In the days of the great depression, many businesses were going down and were valued much less than their amassed assets. This made it easy to see the potential for expansion as times got better, so investors started buying low.
Benjamin Graham is who many claim to be ‘The Father of Value Investments’. He received this title after publishing a couple books around the subject. Security Analysis in 1934 and The Intelligent Investor in 1949. His work is highly influential and the latter is often seen as the ‘bible’ for value investing. In his first book he gives the basic foundation of value investing, and in the second he offers up a more illustrated, practical look to the real world market experience. The one who caught the most fuel and flame from Benjamin’s writings seemed to be a Mr. Warren Buffet, who works the practice of value investing into his day to day routine. Buffet was a student of Graham’s at Colombia’s Business School. To this day, Buffet is the seat holder for the epitome of value investors; encouraging investors to be diligent, informed and patient.
It’s been a long way coming and is not going anywhere. These methods are held firm by Buffet, amongst other countless active investors to date. Evolving from buying clearly undervalued shares in a company in the 20s to now doing due diligence in analyzing a company’s cash flow and market environment. The essence is still the same: buy low when assets and growth potential are high. However, patience is a must as not every business is going to have a fast turn around. There are a lot of factors to take into account when evaluating a company’s value. Invest wisely, and look for lasting value. NFA.
Written by SMH from ofthefreemarket.com on June 8, 2021