Topic: Value Stocks

Learn value investing so you can spot top undervalued stocks for your portfolio

Investors aiming to learn value investing should follow these Successful Investor tips. They include identifying well-financed companies that are established in their businesses and have a history of earnings and dividends.

We advise you to invest mainly in well-established companies; focus on companies that are outside the broker/media limelight; and spread your money out across most if not all of the five main economic sectors (Manufacturing & Industry; Resources; Consumer; Finance; Utilities).

The best investment plans or systems use some variation of this approach. That is, they revolve around choosing high-quality investments trading at reasonable p/e ratios and other fundamental measures, plus diversifying your holdings.

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Learn value investing by following our Successful Investor tips and you will be able to experience better returns

At the core of the Successful Investor approach to strong value investing returns is identifying well-financed companies that are established in their businesses and 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.

Value investors also have long-term mindsets when it comes to investing. Long-term wealth building strategies aren’t built by aiming for outsized returns. They are built over time, and most importantly, by learning not to repeat the market mistakes of the past.

In our view, your goal as an investor, particularly if you follow a conservative investing strategy based on our philosophy, is to make an attractive return on your investments over a period of years or decades. That’s with the least amount of risk. Failure means making bad investments that leave you with meager profits, or even losses.

Unsuccessful investors can still make some profits. They just don’t make enough to offset the inevitable losses and leave themselves with an attractive portfolio return. A key point to remember is that if you focus on the idea that you “never go broke taking a profit,” you may be tempted to sell your best investments whenever it seems the investment outlook is clouding over.

You can learn value investing financial ratios to help you find good investments

High-quality “value stocks” are reasonably-priced stocks that are cheap, in relation to their sales, earnings or assets. Investors hold onto them because they expect that other investors will recognize their value and push up the share price.

When you look for stocks that are undervalued, it’s best to focus on shares of quality companies that have a consistent history of sales and earnings, as well as a strong hold on a growing clientele.

High-quality value stocks like these can be difficult to find, even when the markets are down. But when you know what stocks to look for, you can discover them. Here are three of the financial ratios we use as useful guides in spotting them:

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

Learn value investing, like the approach Warren Buffett has used throughout his investing career, so you can make smarter decisions

Buffett’s first great investing achievement was to sell all his holdings in 1969, just prior to the early 1970s market downturn. He felt that 1969 stock prices were simply too high, from a value investing point of view. He re-entered the stock market in 1974, after prices had collapsed by 40% or more. This alone established his investing-legend status.

Since then, 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.

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.

Take a broad view of the market when you use value investing principles and you can make safer decisions

When they choose stocks, many investors try to cut their workload by taking a narrow view. Rather than look at a wide range of information, they prefer to zero in on one or at best a handful of indicators. This can do more harm than good.

For example: focusing on low-p/e stocks. Many disasters-in-waiting go through a low-p/e period prior to their eventual collapse. However, many investing newcomers get the idea that you should only buy stocks that trade at a below-average p/e ratio.

Low p/e problems can be due to a weakness in the business model, rising competition, doubts about the quality of the company’s management or insiders, or involvement in a business or industry that is headed for a downturn. When one or more of these problems flares up, it can devastate the company’s earnings overnight and send its p/e ratio sky-high.

To get any real value out of p/e’s, investors have to look at them in the context of everything else that’s going on in the market and in individual stocks.

Some investors target value stocks by focusing on situations where apathy and controversy lead to cheaper buying options. How do you feel about this concept?

What are some steps you’ve taken to learn value investing, and how has it helped your investment strategy?


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