When it comes to investing, there are several different strategies people employ. This can be related to the type of investments they choose. For example, one person might invest in stocks while another invests in cryptocurrency. Within the stock investing realm, there are different strategies people might use. There are investors who focus on dividends, and there are those who focus on growth. Another group is known for value investing.
What Is Value Investing?
Simply put, value investors attempt to find stocks that are on sale. These would include stocks that are currently undervalued by the market. Generally speaking, value stocks are tied to established companies with long histories. These companies have passed the period of their most rapid growth in most instances. Newer companies that are smaller would fall into the growth basket.
Who Uses Value Investing?
Many people consider Benjamin Graham the father of value investing. He recommended buying shares of companies that were profitable and that traded at a valuation that was lower than a poorly defined intrinsic value. He came out with this idea after the depths of the Great Depression.
Warren Buffett was one of Graham’s students, and he has popularized the concept even more. Buffett likes to buy shares that are profitable and that trade at a low price. One of Buffett’s most successful value buys was his purchase of Coca-Cola. He looks for companies with wide moats that protect them from their competition. The proof is in the pudding when it comes to Buffett’s investing acumen. His returns have averaged nearly 20 years over his lengthy career.
The Weakness of Value Investing
Value investing can definitely be a solid strategy. However, it is not without a major flaw. Newer companies like Netflix and Amazon trade at high multiples because investors are betting on higher revenue and profit numbers in the future. Therefore, value investors generally stay away from companies that have high levels of promise for the future, and they might miss some home runs in the process.
How To Tell When a Company Is Undervalued
One of the easiest ways to tell a company is undervalued is by looking at the P/E ratio. A lower number in relation to the broader market and the other companies in a given sector might indicate a company is trading at a solid value. However, it’s possible a company might be coming upon problems that would cut its income for a lengthy period. Therefore, a low price-to-earnings number is not an accurate predictor of a solid value at all times.