Topic: Value Stocks

Is Value Investing Still Relevant? Absolutely, If Done Correctly

Is value investing still relevant? Value investing has been used by many investors, in conjunction with other investment considerations, to profit over long periods

Is value investing still relevant? Yes—and here are some tips on how to do it successfully:

Value stocks are generally good bargains, but not all bargain stocks offer good value. The search for value stocks that will rise, and hold their value over time, begins with sound fundamental investing. You look for stocks that are trading at prices that seem cheap in relation to their sales, earnings and assets. As well, these stocks will have what it takes to be successful in the long term, even if most investors haven’t yet anticipated just how successful these companies can be.


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Is value investing still relevant? Yes, but you need more than value investing skills to succeed

Value investing gained a great deal of name recognition and respect because of its association with prominent value investor Warren Buffett. But Mr. Buffett’s investing success rests on far more than a mastery of financial ratios.

Value investing played a role in Buffett’s investment success, of course. But he owes a great deal to his one-time, 5-year departure from the market in 1969. Still, the main contributor to his success is his history of excellent stock-picking, and his practice of holding his top picks for a long, long time.

One thing you won’t find in the making of Buffett’s stock-market fortune is a history of relying on any single investment theme or gimmick. To succeed as an investor, you have to take a broad view in making investment decisions.

Virtually all successful investors have some understanding of value investing, many have some knowledge of technical analysis, and most have some knowledge of a variety of other tools and shortcuts. But virtually all successful investors take a broad view, and apply everything they know to their investing decisions.

As the saying goes, if you’re going to play the game, you might as well look at all your cards.

Is value investing still relevant? Yes, particularly if you want to survive economic setbacks

The core of the long-term value investing approach is identifying well-financed companies that are well established in their businesses and for the most part have a history of earnings and dividends. They are likely to survive any economic setback that comes along, and thrive anew when prosperity returns, as it inevitably does.

When you look for stocks that are undervalued, it’s best to focus on shares of quality companies that have a consistent history of rising sales, if not earnings, as well as a strong hold on a growing clientele.

High-quality value stocks like these are difficult to find. But when you know what stocks to look for, you can discover them. Here are three of the financial ratios we use to spot them:

  • Price-earnings ratios
  • Price-to-sales ratios
  • Price-cash flow ratios

What is a value stock worth over time?

It is best to practice patience with your investments, especially value stocks. All too often, investors buy a promising stock just as it enters a period of price stagnation. Even the best-performing stocks run into these unpredictable phases from time to time. They move mainly sideways in a wide range for months or years before their next big rise begins. (Stock brokers often refer to these stocks as “dead money.”)

If you lack patience, you run a big risk of selling your best choices in the midst of one of these phases, prior to the next big move upward. If you lose patience and sell, you are particularly likely to do so in the low end of the trading range, when stock prices have weakened and confidence in the stock has waned.

Is value investing still relevant? Only if you avoid value traps in the process

Some of the measures that lead you into value traps are statistical. Value traps are stocks that have experienced large price depreciation and are mistaken for value stocks.

They include unusually high dividend yields, unusually low per-share price-to-earnings or P/E ratios, or a low ratio of stock price to book value or other measures of per share value.

Any of these measures can make it seem like a stock is a bargain. But in fact, any of them can simply be due to a low stock price that is the result of selling by well-informed investors who recognize a dismal long-term future.

Another way to fall into a value trap is to put too much faith in the value of a brand name. A strong brand can sell a lot of a strong product, or keep an over-the-hill product going long after competitors have faded. But even the strongest brand name can only do so much.

Use our Successful Investor approach while investing in value stocks—as well as growth stocks for that matter

  • Invest mainly in well-established companies;
  • Spread your money out across most if not all of the five main economic sectors (Manufacturing & Industry; Resources & Commodities; the Consumer sector; Finance; Utilities);
  • Downplay or avoid stocks in the broker/media limelight.

What percentage of your diversified portfolio follows a value investing approach?

Do you have a preference for value investing or growth investing?

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