Value Investing

Everyone loves a bargain which is quite evident when you see them lined up outside the local department stores on Black Friday. People will go through hell and high water just to get something for less than it’s intrinsic worth and this is also true of investors. Value investing is similar to shopping for price reductions in stores except the products are stocks or other financial instruments as opposed to retail goods. Value investing is a strategy all to itself and one in which many people have made a good deal of money.

The Concept of Value Investing
For the most part, value investing is nothing more than making an investment in stocks that are believed to be listed below market value. There are a number of reasons why those stocks might be undervalued but primarily investors believe that the market tends to overreact to news, good or bad, which then causes price movements on the market that aren’t an actual reflection of the company’s long term potential for profit. Because value investors believe that the market is providing a false assessment of intrinsic value, they further believe that this is the time to buy. What investors look for is an opportunity to buy low (exceptionally low!) in order to sell high with a larger margin for profit. However, some words of caution are advisable here.

Estimations and Safety Margins
One thing to be aware of with value investing is that this is a completely subjective practice. Although the relative value of stocks is set by the indices pertinent to movement within a given market, there are simply those times when the market isn’t a realistic representation of a stock’s inherent worth. This is also the consensus among value investors. However, they take it one step further by trying to estimate what a realistic value is on the stocks in question. This can have catastrophic ramifications so it is recommended that if you are going to dabble in value investing you should also consider a safety margin. In other words, buy with a large enough discount that has a bit of room for error in terms of your estimation of that stock’s value.

Methodologies of Value Investing
There are a couple of diverse schools of thought regarding value investing. The first centers around a strategy that simply looks at his or her estimation of today’s realistic value of those stocks which have been undervalued. To put it another way, perhaps they are buying stocks that sell for $100 per share but in their estimation they have been undervalued and should be worth $150 or $200 per share. This is the first methodology which only looks at today’s prices. The other method involves projecting future worth in those stocks. While both methods are speculative (even an outright gamble) there are a good many investors who have made considerable profits with value investing. Just keep in mind the above mentioned caution that it is especially important to provide a margin of safety with either method you choose.

Value investing is perhaps one of the easiest strategies to understand simply because of our inherent human nature. We all love a good deal and that’s just what value investing is all about. Just be careful to make an accurate assessment of why those stocks have been so significantly de-valued. If you feel there was a flaw in their valuation on the index then perhaps this is a good time to buy. Nonetheless, there will be times that those lower prices are a true reflection of their intrinsic value. Yes, there is money to be made here, but only after you have done a careful examination of the market.

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