The Art of Value Investing

 THE ART OF VALUE INVESTING

What is Value Investing?

    Value investing is an investment strategy that includes choosing fundamentally strong stocks that are trading at an undervalued price, as Warren Buffett, one of the legendary value investors, says “Don’t buy fair companies at wonderful prices, buy wonderful companies at fair prices”.

Why Value Investing?

    This investment strategy is a wonderful way to gain sustainable profits as the undervalued stocks backed up by companies with high growth potential are quite likely to mine profits for their investors over the long term. 

    The method by which value investing encourages you to buy such stocks also reduces the risk of the stock declining its position too much during situations like market crashes. Thus having high-return- low-risk investments are a suitable situation for many investors.

    Furthermore, the fact that it requires a fundamental analysis approach with multiple ratios like P/E, P/B, ROCE, D/E, and others makes the information you have to make a decision much more reliable and interpretive than if you got a tip. This also helps investors to maintain or grow their margin of safety as all of the quantitative information helps you to calculate your way into profits!

    Another advantage of using value investment as your investment strategy is that it magnifies the power of compounding as choosing companies that reinvest the dividends back into the company encourages further growth in the stock and then will eventually lead to the benefit of interest on interest for you.

However…

    Despite all these pros of value investing there sure are a couple of cons as well that you need to know before you go for the approach.

    The primary problem of buying undervalued stocks is that many investors do not find such low price stocks no matter how wonderful the businesses' wonderful ratios. This lack of visibility tends to reduce the growth in stock price as the demand is limited, however, the possibility of the company being more visible and high demand over a period of time is very likely as the more the company increases its profitability the more it will come under the target scope of other investors as well.

    One of the most challenging aspects of value investing is that it requires high amounts of patience as those stocks require time to reach their full potential. This is what makes value investing possible for very limited investors that have the patience to wait for the power of compounding to work its magic on those stocks.

How to go about it

    First and foremost, you need to look at it as buying parts of businesses and not stocks because the situation of the stock during temporary market trends does not matter, whereas the business being detected of fraud is something that will actually lead to a sudden and unsustainable fall in the company’s stock price. Therefore, the quality of the company matters more than the price of the stock.

    Next up is that you should invest into companies from industries that you understand and know the future potential of. For example, if you are well versed with the paint industries and how they work in a detailed manner you can understand the best companies in that industry like asian paints and berger paints better than other investors. This does not mean that you need detailed knowledge about a particular industry or company before investing but you sure do need to understand where it is likely to be headed in the long term and whether it will have sustainable demand for the long term with the increasing technology and limited resources.

    Another important aspect to look into for making your value investing approach more effective is to find companies that are well managed that is what is going to help the company to grow to its full potential.

    Last but not the least, try to ignore market trends as much as possible as companies that are fundamentally strong are less likely to take an extreme dip just because the market is down. In fact, the period of market downturns is one of the best opportunities to buy wonderful companies at fair prices for value investors like you and me.

What are you waiting for?

    So now that you know what value investing is with its benefits, disadvantages and how to actually implement it, why not go right ahead and invest into high value companies to earn high returns and become financially free!

~Shagun Johri