Value investing is a proven style to earn great returns in the stock market, as demonstrated by the stellar records of value investors like Benjamin Graham, Warren Buffett, John Templeton, Seth Klarman, and Joel Greenblatt. Value investments and funds focus on companies whose sales and growth margins are less than average. Stock holdings from value funds generally feature lower price-to-earnings and price-to-book ratios. This means that the market de-valued a fund more than it should have based on the fact that its market value is less than its intrinsic value. Value stocks typically have higher yields and value funds can capitalize on company turnarounds. While this may seem like a good way to make a good deal of money, these investments do have their risks. It may be the case that the market correctly devalued the worth of a company and that these companies may never reach their intrinsic value. [1]
EditSteps
EditChoosing Investments
- Develop a "circle of competence". This idea stems business theory and how investors might navigate a huge market full of different types of companies and funds. [2] The idea of a "circle of competence" is based upon the idea that most people, through education or life experience, develop useful knowledge about some areas of the world. For example, adults who have taken a simple economics course might know the basics of how to run a restaurant: finding a rental space for the business, hiring employees to cook and to serve guests, and have a general manager who oversees day to day problems. However, there are specific types of knowledge that make running a restaurant more successful, such as knowing how to get enough traffic into the restaurant, setting food and drink prices, and evaluating operating costs. Not everyone has to know about microchips or tech companies. There are plenty of investments on the market in pretty much any type of company. The key idea of investing within your circle of competence is to focus your investments in companies that you understand in terms of products, marketing, and structure. You don't have to become an expert on every type of technology or business.
- Search for new investment ideas. Find investments with companies that might have a currently low market value, but are well-organized, well-managed, and have a structure and product base that you understand. [3]
- Watch the stock market's new low lists. These are stocks that have been making new lows in stock price within a given time period, typically 52 weeks. There may be several emerging market entities and stocks at low prices. [4]
- Scan each new issue of Value Line. This is a publication that tracks stocks and market entities. You should flag companies that are within your circle of competence and then do further research into each.
- Look at 13F disclosures of major companies such as banks, insurance companies, hedge funds, etc. These are documents that are filed for companies that document all assets valued over $100 million. You can get investment ideas from these.
- Read hedge fund and mutual fund letters. These are where investment firms often make the case for choosing particular investments.
- Read popular business press publications on a regular basis, such as The Wall Street Journal, The New York Times, and the Financial Times. These papers will contain information about companies that could drive a new investment opportunity: company restructuring, acquisitions, lawsuits, etc.
- Evaluate businesses for potential investments. Make sure that you are investing in good businesses before buying investments and stock shares. Look up a company on Value Line and investigate its revenues, losses, and structure. A good business from an investment standpoint is one that can earn high returns on capital. Rarely, businesses can invest this capital back into the business. One way to find businesses that can do so is to look for companies that have grown book value at a high rate on a per share basis.
- Investors often look at a few factors when looking for companies with high returns on capital. For example, popular blogger and investor Greg Spiener suggests looking at the total amount of equity a business has added over the past decade. You should then calculate the return on that investment in terms of profit. This approach will reveal to you what percentage of a company's earnings was reinvested over the past 10 years. This information should help you predict future earnings for that company.
- Invest in good businesses and companies with good management structures. Remember, to keep your research and investments within your circle of competence. [5] Businesses which have high returns on capital will give you good gains on your investments. Companies with a solid management structure are more likely to succeed in the long-term. Some things to look for when evaluating a company for management structure are:
- Does the management have a significant financial investment in the company?
- Have they accomplished what they set out to do in the company mission statement? [6]
- If a company has management with significant investment in the company and they have accomplished many goals, it is likely a good company to invest in.
- To invest in a company, consider buying stock shares or other funds in which the company holds a lot of financial and corporate interest.
EditPurchasing Stocks
- Consider your options in handling and purchasing your stocks. Most investors, especially those with large portfolios, buy and trade stocks using a broker.[7]
- You have the option of going through a broker or brokerage business.
- Some other stock traders and investors like to do so online through sites such as E-trade or Ameritrade.
- Both brokers and e-trading companies will take a commission on your stocks when you buy and sell. E-trading companies tend to exact a lesser fee.
- One of the advantages of going with a brokerage company, such as Charles Schwab or Citigroup, is that they offer brokerage accounts.
- Through a brokerage account, you can buy and trade stocks yourself or go through a broker.
- By going with a company backed brokerage account, you have the advantage of being able to meet or call a broker to ask questions.
- Remember, it is not a broker's job to necessarily to your market research for you. You will need to research and know what type of stocks and investments you would like to buy and trade.
- Open a brokerage account and begin trading. If you are working with a broker, you will want to establish a regular routing and speak with them often.[8]
- To buy and trade stocks, you need to inform your broker of what stocks you would like to buy and how many shares you would like to purchase.
- The broker will execute the purchase or trade on your behalf.
- If you are going through a brokerage, your broker will exact a commission on the sale or trade. This fee typically several cents per share.
- Online brokerage accounts through Ameritrade or E-trade charge smaller commission fees, but remember that you do not have the advantage of the advice of a broker in these cases.
- Many companies allow you to manage your brokerage account online as well with a face-to-face broker.
- Decide whether you want to purchase stock at "market order" or "limited order". Your broker or online service will help you buy or trade stocks with both of these options.[9] A market order is when you request a stock purchase at market price. A limited order is when you request to purchase a stock at a limited price.
- For example, if a share of stock is $110 at market price, and you only want to pay $100 dollars, your broker will wait until the market price of the stock is $100 per share before making the purchase.
- Consider buying stocks directly from a company. While the traditional means of stock exchange is through brokerages, some companies offer stock purchases directly through purchase programs.[10] The advantage of direct-buy stocks is being able to avoid a brokerage commission fee.
- Online publications, such as DRIP Investor, will allow you to see lists of companies with direct-buy options.
- Direct-buy options can be tempting. Be sure to do your research on direct-buy stocks just as you would if you were going through a brokerage.
EditAvoiding Risks and Common Mistakes in Value Investing
- Manage the risks of your portfolio. You will need to go over your investments and stock holdings regularly to see if any of your investments are performing poorly. [11]
- Set aside a regular period of time to go over your portfolio. Think about each of your holdings.
- Evaluate whether or not each holding has any financial risks associated with it.
- Can you imagine a scenario where you could be wiped out financially? If so, you need to look for where your portfolio is weakest and attempt purchase other investments as safeguards in that event.
- Is your portfolio over-concentrated in one stock or industry? Seek to have a diverse portfolio that is not concentrated on one type of investment or industry. If you see that your portfolio is overly concentrated in one area, consider buying stock or investments in similar companies and industries.
- If your company's valuation is predicated on growth, are you certain that growth will occur? If you are uncertain that growth will occur, you will need to watch that investment carefully to see if it is worth holding onto.
- Are you holding undervalued shares that could result in a permanent loss of personal funds if the economy is in a downturn? If so, you may need to find a way to sell these or work in safeguards to prevent personal financial losses.
- Understand that you will need to put much of your time and effort into your portfolio. You will need to constantly do research on new investments, discuss your holdings with stock professionals, and hold some basic stocks and funds to fall back on. [12]
- Don't fall back on simple analysis of your investments and the idea that these will be easy to sell if you decide to dump them. Don't base your decisions on a simple write-up of an investment in a financial magazine or blog.
- Stick to investments in companies within your circle of competence. While more exotic stock options such as biotech, alternative energy, and other emerging markets might seem more exciting, you should stick to simple investments in industries you understand.
- It can be tempting to jump on a technology fad. If you have little understanding of how tech firms and companies operate and are valued, you might not be able to properly evaluate the risks involved with investing in these companies.
- Always look into the track record of a company's management. A poor management strategy and history of poor management are red flags. You should not purchase investments or stocks in companies with this kind of record.
- Changes in management structure and financial holdings of a company will be available in the 13F disclosures of the company.
- If you have lost money, pay attention to why and how. It is important to learn lessons from your investment mistakes. A financial loss may show you where your portfolio is lacking and which of your investments are too risky.
- Do some research in the history of financial investment to see what strategies have worked in a successful market. There are many books and articles on this subject available from financial news sources such as Forbes and the Wall Street Journal.
- Be a learning machine. You need to constantly do research on new investments and opportunities. [13] Even after you have built up a good portfolio, you will still need to research new investments. Doing this will allow you to see how the financial market is changing. Part of being a successful value investor is knowing how the financial market is changing.
- Read financial newspapers and stock exchange information on a daily basis.
- Always think about how a changing market will have an effect on your portfolio.
- You might want to sell some investments or re-evaluate certain holdings in light of your research.
- On the other hand, you might discover new investment opportunities that can help safeguard more risky holdings that you have.
- This will allow you also to see what emerging companies are up and coming. This will allow you to make new investments.
- Follow the blogs of successful investors to see what kinds of unique opportunities and strategies they are using. These can draw your attention to new types of companies or sources for your research.
EditRelated wikiHows
- Calculate Bond Value
- Calculate the Market Value of a Company
- Invest in Stocks
- Invest in Penny Stock
- Do Time Value Money Calculations
EditSources and Citations
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