How Valuable is Value Investing?
It goes without saying that we want our investments to increase in value. But value investing here is a strategy for choosing investments compared to growth and other strategies. Some may say that this is an exercise in semantics, but it is important to understand the nuances of these strategies to help you determine your own.
“’Buy low, sell high’ is a simplistic and not very realistic way to think of investing in this day and age, especially when you are organizing your long-term portfolio,” explains Richard Cayne of Meyer International. “You want to cultivate your allocations to ensure they maintain their value or offset other, possibly riskier, investments.”
Value investing focuses on long-term growth
Consider the “value” in “value investing” to mean more “bargain”. As mentioned before, value, growth, and other investment strategies obviously aim to increase value or profits. But value investing specifically searches for companies that are under-valued by the market but that have great potential for long-term growth. This is why it may be better to think of value picks as bargains.
We have all seen how the markets’ knee-jerk reactions can cause a fundamentally sound company’s value to drop in the near-term. The idea is that value investors look beyond the current swings and turbulence that currently affects markets and delve into a company’s performance and future potential.
Value means more than just numbers
Underlying most value investment strategy is calculating an investment’s intrinsic value. Basically, that means how much a stock is worth, compared to what its current price is. A true value stock will have an intrinsic value greater than its current stock price, and this is what makes it an appealing value investment.
Some experts will do this calculating by the numbers. They may look at a company’s price-to-book ratio and compare market capitalization to book value (total assets minus total liabilities). Others may look at price-to-earnings ratios or even analyze a company’s cash flow as it relates to its debt and capital. But there are other factors that are just as important besides numbers. This includes evaluating a company’s overall business model and plans, how it compares to competitors, and current and projected trends in their industries.
Buy low, keep as it goes high with value investing
Monitoring companies for their value investment potential can be a full-time job. And it is for financial professionals. So, if this seems like an appealing strategy for your investment risk appetite, you should find a trusted financial expert, like Richard Cayne, who can answer your questions about how a value investing strategy may work best for you.