For the common citizen who has a normal job, investing is usually a field that is very hard to understand. There are various types of investment opportunities and they all require a very thorough understanding of the capital market. Today we are going to discuss about the characteristics pf value investing. Explained in simple words, this type on investing consists in buying stocks at very low prices. It is based on the idea that the market doesn’t always reflect the true value of a stock nor does it anticipate the financial development of a certain company. Therefore if you manage to spot those undervalued stocks you have the possibility to buy them at a discount price.
The trick to value investment opportunities is the fact that they requires a certain intuition. Normal investment ventures usually require detailed information about the capital market trends. On the other hand the value type of investing means having a lot more insight on certain companies. It starts from the statement that the market was actually wrong when it evaluated certain stocks. However this activity can’t solely be based on intuition. You usually needs to take a margin of safety. This means that the value of the stocks needs to be small enough in order for it to cover risk factors and leave some room for error. Therefore value investing is not only based on intuition but also on risk management.
This type of investing was defined in 1930 by two finance professors. The fundamentals of value investments are earnings, dividends as well as cash flow and book value. Knowing these fundamentals will help you see the differences between undervalued stocks and declining stocks. The value of a company must not be determined based on its previous performance but on its intrinsic value. This value is determined with solid financial statistics. While some inexperienced people focus on small term results and therefore choose to trade based on value investing( selling the stocks right after the market has recalculated a company’s value) others focus on long term results. However, long term is actually a better choice when it comes to value investment opportunities.
This type of investments opportunities can be found at all times anywhere in the world. Although they can present themselves in all kinds of economic fields they are more often hidden in industries that have recently experienced difficulties or who have been affected by an overreaction to a certain piece of news. There are a few tricks that you can use in order to spot these kinds of investments opportunities. First of all the share price should be about two-thirds of the intrinsic value and the PEG should be less than one. Furthermore the debt needs to be smaller than the equity and the earnings should have grown with at least 7 % per year in the last ten years. There are many more such indicators of value investing but one should do a lot of research before trying to make money this way.
