Value investing is one of the world’s oldest and most popular investment strategies. Benjamin Graham, considered the father of value investing, outlined his value investing philosophy in his book The Intelligent Investor.
No, value investing is not as thrilling as buying and selling NFTs.
But it’s a fundamentally-sound strategy that’ll help you achieve your long-term financial goals – if you understand and implement it into your investment strategy.
In this guide, I’ll talk about value investing, why it’s so powerful, and how to implement a value investing strategy (while not being a boring investor).
What is Value Investing?
Value investing is an investing strategy where you buy stocks priced below their intrinsic value. Intrinsic value is the value of a company’s stock based on its actual worth, as opposed to its market value. In its simplest terms, it’s calculated by estimating a company’s future cash flows and then discounting them back to the present.
The goal of value investing is to find stocks that are undervalued by the market and buy them at a discount. When the stock eventually becomes valued correctly, you sell them and make a profit – in theory.
Value investing isn’t about buying popular stocks or being hyped up on Reddit; it’s about finding companies with good fundamentals selling for less than they’re worth.
Benjamin Graham believed that by analyzing a company’s fundamentals, such as its earnings, assets, and debt, an investor could determine whether or not a stock was undervalued.
More On Intrinsic Value
Building off my point above, “intrinsic value” is the value of a company or security based on its inherent qualities, such as earnings, assets, and dividends, rather than its market value.
Intrinsic value is calculated by looking at a company’s fundamentals, such as earnings, assets, and dividends. The most common way to calculate intrinsic value is the discounted cash flow (DCF) method. The DCF method calculates the present value of a company’s future cash flows.
This considers the time value of money and discounts the future cash flows back to the present day.
While I’m not going to go deep into how to find intrinsic value (you can look at the linked articles for that), I want to emphasize its importance.
Intrinsic value is subjective in most cases – meaning that different investors will have different intrinsic values, making it that much more difficult to decipher and all the more reason why you need a set of value investing guidelines.
Why Value Investing is a Smart Strategy
I could go on and on about the reasons why value investing is such a good strategy, so for now, I am going to give you six key reasons it’s wise to try value investing:
Value investing is a simple investing strategy that anyone can learn. You don’t need a Ph.D. in economics or finance to understand it. You need to research and find companies trading for less than their intrinsic value and buy them.
Value investing has been around for over 100 years, and it’s been proven to work over the long term. If you look at the stock market’s historical performance, value stocks have outperformed growth stocks by a wide margin.
Value investing is a low-risk investment strategy. When you buy a stock for less than its intrinsic value, you’re buying it at a discount, which gives you a margin of safety. This margin of safety protects you from losses if the stock doesn’t perform as expected.
While value investing is a low-risk investment strategy, it also has the potential to generate high returns. Over the long term, value stocks have outperformed the market by a wide margin.
One of the benefits of value investing is that it can generate passive income. If you buy stocks that pay dividends, you’ll receive regular payments from the company regardless of how well the stock performs. This can provide you with a valuable source of income, especially in retirement.
Another benefit of value investing is that it offers tax advantages. If you hold your stocks for more than one year, you’ll be taxed at the long-term capital gains rate, which is lower than the ordinary income tax rate.
How to Think More Like a Value Investor
Without delving too deeply into value investing strategy, here are a few ways you can start to think more like a value investor right now:
Look for Companies With a Wide Moat
A company with a wide moat has a sustainable competitive advantage over its competitors. This could be in the form of a strong brand, a cost advantage, or a unique product or service.
Wide-moat companies are typically able to generate higher returns on capital than their competitors and are, therefore, more attractive to value investors.
Focus on the Long Term
Value investors are patient investors who take a long-term view of their investments. They understand that it takes time for companies to generate shareholder value and are, therefore, willing to hold onto their investments for extended periods. This patience allows them to benefit from the compounding effect of earnings growth over time.
Be Disciplined in Your Approach
Value investors are disciplined in their approach to investing. They have a clearly defined investment process that they stick to regardless of market conditions. This discipline allows them to avoid making emotionally driven decisions that can lead to poor investment outcomes.
Do Your Research
Value investors believe in conducting their research rather than relying on the opinion of others. They understand that no one has perfect information and that everyone is biased in some way. By conducting their research, they can better understand the companies they invest in and make more informed investment decisions.
Value investing is a patient strategy that requires patience and discipline. It can often take years for a company to generate shareholder value and realize its true intrinsic value. Value investors must be willing to wait for these opportunities and not be swayed by short-term fluctuations in the market.
Value investing is a tried and true investment strategy that has been around for over 100 years. It’s a low-risk investment with the potential for high returns, and it can also generate passive income. By following these tips, you can start to think more like a value investor and reap the benefits of this powerful investment approach.