This is an article about why value investing is not dead and how you can take the most out of value investing.
What is Value Investing?
Value means worth.
Investing at a value price means investing at its worth price even if it is low than the current market price. Technically, the value price is referred to as intrinsic value.
It is a prevalent idea that if there are two stocks, both have worth of 100$, but the market price of the first stock is 60$, and the other stock is 140$, you will definitely buy the other stock. But will it value to you in the long run?
Value investing was invented by Benjamin Graham and followed by many of his students like Warren Buffet, David Dodd, and many more, but not all.
So, value investing is basically a strategy to trade at an undervalued price so that its worth can be achieved in the future.
Why Value Investing is Essential?
Let’s say you are going to buy a phone.
One is very effective but not efficient, whereas the other is efficient and not so effective.
You would prefer the first one because you know that the second one will get damage before the first one. So it is better to buy a thing which is “WORTH THE MONEY,” no matter what the differences are there in the price.
Value investing always tries to teach that “Do not overreact.”
Maybe now you are buying a stock for 100$, and after three months, you are getting 130$. That sounds only cool, but in reality, it is not. Its value may not be sufficient.
And that’s where most individuals lack, i.e., in assessing the intrinsic value of a stock.
Who are Value Investors?
The stock market is filled with individuals who know the price of everything but the value of nothing.
Value investors are those who do not follow everyone who does not support the market, who do not immediately get influenced. The exactly do the opposite of the trend and demand. Value name suggests they are worthy people. They are intelligent and play smartly.
You will get billions of investors who follow the current market price, but in billions, only one is there who follow value price, and that’s who value investors are.
Investing without an education and research will ultimately lead to regrettable decisions. Research is much more than just listening to popular opinions.
What is the Strategy of Value Investors?
Value investors buy the stock when they are undervalued and wait till it reaches its worth or above. It can be explained in the three-step formula:-
|1.Purchasing stocks at less value than they are worth|
|2.Holding them for an extended period|
|3. Selling when they reach their intrinsic value or above|
For example, as you all know, Reliance is a big telecommunication company and has a substantial market value. Let’s say the worth of its one share is 50$.
Now one time will come when it will be selling for 30$. You would be wondering that there might be some loss; that’s why it is undervalued, and it’s better not to purchase.
But my friend, here you go wrong. You don’t have to follow what others are thinking and doing. You have to be different. So buy that share at its discounted value that is 30$.
Now, wait and wait and wait. One day will definitely come when it’s worth it will be again 50$ or above, and that will be the time when you have to sell.
There are basically two journeys in the market cycle psychology where you have to know the actual worth of stock.
Optimism to Pessimism
In the middle, there is EUPHORIA, where the bull market ends. Before that, the excitement and thrill dominate, and after that, the denial and fear dominate.
Pessimism to Optimism
In the middle, there is ANGER where the bear market ends. Before that, the panic and capitulation dominate, and after that, hope and disbelief dominate.
You have to fight against these two journeys and then come at a conclusion point.
So now one more thing is clear that value investing is not for short term investors. It will be preferable if you are investing in the long run. Then only go for value investing.
What are the Requisites of Value Investing?
See value investing is a long term plan. You can’t sell when the market gets heated. They are only the forces that will play with your mind and force you to follow the market. But you have to be stick to your plan.
It is a simple approach and typically means that before value investing, you must thoroughly go through the company’s goals, strategies, strengths and weaknesses, SWOT analysis, PESTLE analysis, and many more. Because these are the only ones which will show you in numbers and you can estimate easily. The six useful websites for stock research are- Yahoo Financé, CNBC, Money Control, Screener, Investing.com, Economic Times.
Sometimes the ratio analysis and the financial statement analysis may be biased to ascertain the public a good picture of the company even if it is not so. Then there you have to use your intellect and be a detective in terms of analyzing, then only go for value investing.
You are an investor, not someone who can predict the future. Base your decisions on real facts and analysis rather than risky, speculative forecasts.
Out of clutter, find simplicity. From discord, find harmony. In the middle of difficulty lies opportunity.
“Value investing guru Benjamin Graham argued that an undervalued stock is priced at least a third below its intrinsic value.”
It means that the value should be only one—third or more than the current market price. If it is less than one-third, then do not ever buy that stock. Losses are occasional in case of value investing. So you have to correctly estimate the value and its one-third and then go accordingly.
Why Value Investing is Not Dead?
I hope that at this point, it is clear now, and you have an answer to your question of why value investing is not dead?
It can never be dead. Although, to some extent, it is declining because today’s generation is so impatient that they don’t actually want to put some extra efforts and wait for the long run. They go with the herd and follow what others are doing. But still, some investors go for intrinsic value rather than market value.
Always remember you have to be unique if you want something unique.
Value investing is a long-term strategy. Like Warren Buffett, always buy stocks with the intention of holding them almost indefinitely.
He once said, “I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for ten years.”
Hence, You will definitely want to sell your stock when the time is there to make a significant purchase or let it off. Still, by holding a diversified portfolio and maintaining a long term goal, you can actually sell your stock when it reaches or exceeds market price value or the price you paid for them to purchase.
Also check out this DCF valuation excel template to calculate the fair value of the company before buying it.