What is Value Investing?

Malcolm Tatum

Value investing is an investment style or strategy that involves the acquisition of stocks that are currently trading at less than the current perceived worth of the stock. The idea is to locate stable stock options that are undergoing a temporary fall in unit price, but are still considered to be good risks for future growth. From this perspective, value investing is all about doing research and projecting future performance.

Businessman giving a thumbs-up
Businessman giving a thumbs-up

Investors who want to find some great deals by employing the value investing approach will look closely at stocks that are currently declining. Using this listing as a starting point, the investor will examine the history of the stock and the underlying issuer, including the historical price to book ratio. The investor will also evaluate the current status of the company against the current market conditions, and determine if there is a reasonable chance that the stock will begin to rise beyond the current purchase price when and if it does bounce back from the slump. If it is believed that the price/earnings ratio and the associated risk is reasonable, then an investment in the stock is likely to occur.

Because the nature of investing involves a certain degree of risk, it is important to understand that it is still possible to lose money when using the strategy of value investing. A given stock may not eventually level out and continue to fall in value, causing the investor to lose more money each day. In other instances, the stock may eventually bottom out and begin to rally, but never climb back to the unit price paid by the investor. There is also the chance that the investor will have misjudged market trends and find that broad conditions that were anticipated to disappear remain in place for an extended period of time, thus preventing the chance for the stock to rally at all, even though it does reach a plateau.

At the same time, value investing is an excellent way for the investor to pick up some great commodities, hold them long enough to realize a profit, and then sell quickly before the stock has a chance to level off and begin to descend a second time. Investors who choose to employ this approach tend to understand they are not making investments for long term possession, and expect to buy and sell at a relatively rapid rate.

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