06 Nov What Constitute Value Investing
There are many ways one can invest. We choose to use Value Investing when we invest. Here are some of the characteristics of Value Investing.
- Irrational Market
We believe that the market is made up of irrational investors. Hence, the prices traded on the stock market do not accurately reflect the true value of a stock.
A stock may be underpriced or overpriced mainly due to its investors’ sentiments, which brings us to the next characteristic.
- Intrinsic Value
As value investors, we believe that every stock has its intrinsic value. This is the true value of the stock and it is not related to the price that it is currently trading at.
We aim to look for stocks that are trading at a price below its intrinsic value. Pretty much like going into a store to look for items sold at a bargain.
If our research and analysis are done right, there is a chance for the stock price to rise to its intrinsic value over time.
- Margin of Safety
There is risk involved in any type of investing. It is no different in Value Investing.
No matter how in-depth your analysis is, you can never guarantee that a stock’s price will move in the way you’d predict it to. Especially because of #1, some stocks’ true value will just never get realised on the stock market.
Hence, to minimise our potential loss, value investors always look for a margin of safety; which is determined by the difference between its intrinsic value and its current price in the market.
Basically, we want a wider gap between the stock’s intrinsic value and its current price in the market. For example, Benjamin Graham was known to only invest in stocks that were trading at 2/3 of their intrinsic value.
- Time and Effort
Many value investors make use of fundamental factors to evaluate stocks, and there are little to no good fundamental stock screeners available. Even with a stock screener, value investors would still need to carry out their own due diligence.
Also, as mentioned in #1, the market is irrational. It could take a while for a stock’s true value to be realised in the stock market. A value investor may need to wait for months or years before a stock can realise its true value for a positive return.
The waiting time for a positive ROI is something that most average investors find difficult to adhere to.
Value investors tend not to make investment decisions according to what everyone else is doing. In fact, we believe that you have to be a contrarian to succeed as a value investor.
And it is not easy.
To buy when the rest of the market is selling (i.e. when the market is plummeting), or to sell when the rest of the market is buying (i.e when the market is booming)
This process can be eased if you have a strategy with clear buy and sell guidelines.
P.S. This is not a preview. All participants will graduate knowing how to analyse and invest in value stocks based on the CNAV strategy.