Value investing is an investment strategy that focuses on a particular type of stock. This method involves buying only the stocks that look undervalued — you buy a low-priced stock, then hope that its value will skyrocket over time. Of course, you need to choose stocks that have the potential to rise.
Value investing can make you rich if you play the market perfectly. You’ll need to do your research; carefully inspect every company you’re interested in. Not every business will turn the value of their stock around, so you need to be careful.
Be sure to keep reading if you want to learn more! We’ll be going over everything you need to know about value investing in this article. Before you make any investment decisions based on this highly effective and popular trading strategy, you’ll want to understand as much about the topic as possible.
IMPORTANT SIDENOTE: I surveyed 1500+ traders to understand how social trading impacted their trading outcomes. The results shocked my belief system! Read my latest article: ‘Exploring Social Trading: Community, Profit, and Collaboration’ for my in-depth findings through the data collected from this survey!
Table of Contents
What Is Value Investing?
Investopedia defines value investing as “…an investment strategy that involves picking stocks that appear to be trading for less than their intrinsic or book value”. In other words, you’re looking for stocks that have prices for less than their worth. It’s similar to buying something on sale.
How Value Investing Works?
To be successful in value investing, you’ll need to evaluate the true value of the stocks you’re looking at. In most value investment scenarios, you want to, almost solely, look at quality companies. That way, you know you’re still getting quality stock, even though it is at a lower price. The prices may change with demand, but the company should still be doing well.
Stocks can go “on-sale” several times a year. When that happens, as a value investor, you must be able to identify and act on such opportunities by purchasing lots of these undervalued shares. When the prices rise again, you make the sale and profit handsomely from the transaction.
Value trading isn’t like day trading. For the majority of your value trades, you may need to hold onto the stock for an extended period for the highest reward. However, if you invest at an extremely low price and the value of the stock shoots up, you can become rich.
How To Make Money With Value Investing?
To make money value investing, you’ll need to find good undervalued stocks. A value stock has an inexpensive cost compared to its assets, revenue, cash flow, and earnings. The best value stock will also provide constant profits and come from a strong business.
You always want to do your research into any value stock you find. Sometimes, people will get excited over a value trap, which resembles good value stock. However, they don’t turn out the way you want, and their price continues to decline.
Understanding as much as possible about the market is going to be your best bet. The Warren Buffett Way by Robert G. Hagstrom covers plenty of essential information that beginners need to know.
Take Your Time
In the age of technology, many of us need things to happen fast. However, when it comes to value investing, you need to take your time. It’ll feel like a lot of waiting around, but it’ll be very worth it someday.
Overall, the best way to make money with value investing is to be patient. While you may want money now, it’s going to be best to wait. That way, in the future, you could have a better chance to be rich.
A Step-by-Step Guide To Value Investing
There are four basic steps that you’ll need to follow to make a successful value investor. Here’s how to begin value investing step-by-step:
Find a Valuable Piece of Stock
First, you’ll need to find a valuable piece of stock. Look for companies that have no records of losses over the last five years. The total debt amount should also be less than 10% of the total equity, and the share price should be lower than the book value per share.
You also want to make sure the stock has a high yield. The best options include a yield that’s twice as high on AAA bonds. If you can find the perfect value stock, make your investment right away.
Stick to the Plan, Even When Prices Decrease
There can be long periods where your value stock isn’t performing well. You want to stay logical. Often, people will sell their stock based on emotion. When it comes to value stock, you need to stick to your plan above all else.
Down Markets can be an opportunity, so don’t hesitate to play them. While it may seem like the stock is declining, it could suddenly spike, making you massive amounts of profit.
Look for Stocks in Newer Markets
Not all value stocks are going to be in well-established markets. You want to also look into emerging markets. There may be more risks, but there are also likely to be more opportunities to buy good value stock.
Don’t Ignore Bad Stocks
Investors tend to avoid “bad” stock. However, these are the stocks you want to look into. If you can find cheap stock with reliable business models and strong management teams, then make sure you invest. Oftentimes, these are the kind of investments that’ll make you the most money.
It helps if you go with your gut and try to ignore what everyone else is doing. You’ll have a more challenging time making money if you follow the crowd. While the stock may seem bad now, it could quickly spike in a year or two.
Consider the Margin of Safety
Value investors must know what the margin of safety is. You’ll want to leave some room for error when considering which stocks to buy. Your margin of safety will also look different than other investors, depending on the amount of risk you’re comfortable with.
This video teaches you how to create a margin of safety:
Do Your Research
Research is one of the essential parts of value investing. You need to know and understand the following about the business:
- Their long term plans and strategies
- Financial structure and records
- Their management/CEO
- Their basic business principles
When value investing, be sure that you can get dividends from the stock. Profitable businesses will often give some of their profit back to investors, helping you earn some money. At the same time, you wait to sell the value stock.
However, you want to find steady returns; they don’t need to be remarkable. They’re less risky and provide you with consistent returns.
Analyze the Stock Value
As part of your research, you need to estimate the intrinsic value of a stock. It requires serious financial analysis, but also some guessing. You may come up with something different from another investor looking at the same stock; that’s alright!
You’ll want to trust yourself. As long as you do the research and analyze the value of the stock, you should make confident choices.
Diversify Your Investment Portfolio
Next, make sure that you diversify all of your investments. The more assets you have in your portfolio, the less likely you’ll receive a hard loss. It also helps to do this with any value investing strategy.
You should be receiving dividends and have several different types of value stocks. If you diversify, you’re much more likely to succeed at value investing.
Author’s Recommendations: Top Trading and Investment Resources To Consider
Before concluding this article, I wanted to share few trading and investment resources that I have vetted, with the help of 50+ consistently profitable traders, for you. I am confident that you will greatly benefit in your trading journey by considering one or more of these resources.
- Roadmap to Becoming a Consistently Profitable Trader: I surveyed 5000+ traders (and interviewed 50+ profitable traders) to create the best possible step by step trading guide for you. Read my article: ‘7 Proven Steps To Profitable Trading’ to learn about my findings from surveying 5000+ traders, and to learn how these learnings can be leveraged to your advantage.
- Best Broker For Trading Success: I reviewed 15+ brokers and discussed my findings with 50+ consistently profitable traders. Post all that assessment, the best all round broker that our collective minds picked was M1 Finance. If you are looking to open a brokerage account, choose M1 Finance. You just cannot go wrong with it! Click Here To Sign Up for M1 Finance Today!
- Best Trading Courses You Can Take For Free (or at extremely low cost): I reviewed 30+ trading courses to recommend you the best resource, and found Trading Strategies in Emerging Markets Specialization on Coursera to beat every other course on the market. Plus, if you complete this course within 7 days, it will cost you nothing and will be absolutely free! Click Here To Sign Up Today! (If you don’t find this course valuable, you can cancel anytime within the 7 days trial period and pay nothing.)
- Best Passive Investment Platform For Exponential (Potentially) Returns: By enabling passive investments into a Bitcoin ETF, Acorns gives you the best opportunity to make exponential returns on your passive investments. Plus, Acorns is currently offering a $15 bonus for simply singing up to their platform – so that is one opportunity you don’t want to miss! (assuming you are interested in this platform). Click Here To Get $15 Bonus By Signing Up For Acorns Today! (It will take you less than 5 mins to sign up, and it is totally worth it.)
Conclusion
Value investing is slow but worth it. You’ll need to be patient if you want to make a significant profit; value investing earns you money in the long term. If you follow your plan and do your research, you could potentially become rich in the future.
So, hold onto your value stocks. Soon enough, you’ll be able to sell them for several times what you bought them for. If you need to learn more about investing, be sure to check out some of my other posts! We have plenty of information for you.
BEFORE YOU GO: Don’t forget to check out my latest article – ‘Exploring Social Trading: Community, Profit, and Collaboration’. I surveyed 1500+ traders to identify the impact social trading can have on your trading performance, and shared all my findings in this article. No matter where you are in your trading journey today, I am confident that you will find this article helpful!
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