Value investing is the strategy of selecting stocks that trade for less than their intrinsic values.
Value investors actively seek stocks of companies that they believe the market has undervalued.
They believe the market overreacts to good and bad news, resulting in stock price movements that do not correspond with the company's long-term fundamentals.
The result is an opportunity for value investors to profit by buying when the price is deflated.
Typically, value investors select stocks with lower-than-average price-to-book or price-to-earnings ratios and/or high dividend yields. The big problem for value investing is estimating intrinsic value. Remember, there is no "correct" intrinsic value.
Two investors can be given the exact same information and place a different value on a company.
For this reason, another central concept to value investing is that of "margin of safety". This just means that you buy at big enough discounts to allow some room for error in your estimation of value.
Value investors take a long-term view of the market.
What holds true for any investment is that at some point its true value will be recognised and it is at this point that value investors make their money.
A value investor is not a trader. In fact, they are almost the exact opposite to a trader.
A trader looks for a trend in the market and profits from trading on the back of the trend. A trader is not looking at the fundamentals of a company only what direction it is moving and how fast. A trader will follow the herd with a view to exit before the herd turns.
A value investor always goes against the herd.
In recent times, investors buying into QBE have been value investors. While the rest of the market is exiting the stock, the value investor is buying with the long-term view that the stock, will return to its fair value in due course.
In the current market conditions, the value investors come into their own.
When the market takes a fall as we have seen over the past 2 years many quality companies get thrown out with the bad. This is the time to buy.
Like to learn more? We will be running a seminar on value investing next month.
Numbers will be limited to 10 clients per seminar.
If you are interested let us know ASAP.
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