If you have been searching online for different investment strategies, then likely you have found information about a strategy known as “Value Investing”.
This has been made famous by the top investors like Warren Buffett who have accumulated billions of dollars using this simple strategy of investing. Buffett’s company, Berkshire Hathaway, has become one of the most valuable companies in the world by using this method of investing in stocks.
And the method is simple.
Many think that investing is some kind of crazy, complicated mathematical formula. And while math plays a part, it is mostly common sense.
Before I explain exactly what value investing is, take this example.
Let’s say that you would like to buy an apple and it is selling for a price of $10. Well you may not consider that a fair price.
You may think that an apple at that price is ludicrous for it’s actual true value.
Perhaps you think that $2 is a better price for buying an apple. So you pass on paying ten bucks for it at this time.
But then you come across someone who is selling the exact same type of apples, from the same farm, and for just $1.
After inspecting it is the same apple. But selling at a discount of the price that you consider fair, which you see as being $2.
And so you are willing to invest in buying the apple because you see it as selling at a discount.
Believe it or not if you understand this then you essentially understand value investing.
Value investing is quite simply buying shares in a company at a discounted price then what you consider to be the fair value, the intrinsic true value, of the underlying business.
If you can buy at a share price which is below what it is worth, then eventually the stock market will agree with you. Provided of course you have conducted thorough analysis and are correct with your calculations.
And so that is what value investors strive to do.
Look into the stock market and identify companies that are trading at a substantially below market price for what the business is actually worth.
Having bought the stock at a discount and hopefully factored in a sizable margin of safety you are now well positioned to make a profit off this stock as the share price begins to rise. In addition to any dividends the stock may come with.
And so that is really what value investing is all about. A simple strategy of finding stocks that are trading below their true value, buying them, holding them and then selling them when they become over valued.
If you can create a method of valuing companies that gives you an accurate figure of their intrinsic value per share, then you can compare that to the current market price and make your decision.
As you can see it’s a dead simple strategy of investing, in principle anyway. There are of course a lot of things to consider when building out your investment portfolio based on a value investing strategy.
Things like how to find the intrinsic value of a stock. Working out a safe margin of safety for the event that something goes wrong. And dealing with your own personal emotions, like fear and greed, which can cause you to make false decisions.
All this and more is covered right here, on In Stock News.