A Quick Explanation Of Value Investing
There are several well known investment strategies that traders use when buying stock. For those new to investing, one of the easiest to understand and implement is called “value investing”. It’s a strategy that generally doesn’t require deep knowledge of finance, or expensive software and subscriptions to financial data, which is why it’s popular with beginners.
What Is Value Investing?
The basic concept of value investing is to buy stocks at a “discount”, and wait for them to return to their “full value” or higher before selling them. The idea is fundamentally the same as waiting for something you want to buy to go on sale before purchasing it. Instead of paying full price, you get the exact same product for less money.
The big difference in the case of investing is that you can’t predict when a given stock will be available for less than it’s actually worth. It also requires that you know the true value of a stock to begin with in order to judge when it’s being offered at a discount.
Why Stocks Get Discounted
Stock prices fluctuate every day, and there are dozens of reasons why the price of any given stock may go up or down. Things like new product launches, high-profile hiring (or firing) of company executives, stories in the news, and earnings reports are common events that tend to move the price of a stock.
If a company is doing well, making money, and growing, you would expect the price of it’s stock to go up. If, however, the CEO of the company has a few too many drinks one night and posts something offensive on Twitter, the market may react the next day and the price of the stock might dip.
This is likely an opportunity to get the company’s stock at a discount. Fundamentally, nothing has changed at the company. Unless the comments were so offensive that people stop buying the company’s products en masse, the company will continue to grow.
Value investors need to be careful about knowing whether an event that affects the price of a stock is merely superficial (as in the case of a bad tweet) or more fundamental. Fundamental changes to a company (like a failed product launch) will affect things like revenue and growth, and the stock value may not recover for a long time as a result.
Value investing is a bit of an art form. You can’t simply use a value-investing formula to pick the right stocks that fit all your desired criteria. Like any investment strategy, you must have the patience and diligence to stick with your investment philosophy even though you will occasionally lose money.
For those who want to start investing, but would like some professional guidance, consider speaking with an experienced financial planner. At Miles Brown Asset Management, we can help you find and investment strategy that’s tailored to meet your financial goals. To learn more, please contact us today.
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