How Value Investing Strategy Works In The Real World
Something which I think many beginner investors can benefit from understanding is how how the value investing strategy plays out and works in the real world.
Here we’ll dive into what exactly value investing is how it works and I’ll show you three simple steps to implement this strategy so that you can profit from the stock market and grow your money.
OK now let’s get started.
So what exactly is value investing?
Value Investing is simply an investment strategy where stocks are selected that trade for less than their intrinsic value.
So what does that mean?
Intrinsic value here is a real or true value of a company by doing value investing you simply invest in stocks that are currently undervalued or become temporarily cheap.
Value Investing is driven by the idea that there are ways to benefit financially from the events that cause stock market prices to swing up and down.
So when there are rumors or bad news about a company its stock price will drop.
And as a value investor you simply take advantage of these events and buy the company’s stock at a much lower price.
On one level a stock’s value is reflected in its current market price.
Since the market price indicates how much investors are willing to pay for a stock at any given time it indicates the stock’s market value.
But the key point to note in value investing is that a stock market value is not the same thing as its fundamental or intrinsic value.
Sometimes businesses can become temporarily popular or unpopular for a variety of reasons that have little to do with the true worth of their revenues.
Net assets or their future income potential.
So as a value investor our job is to find a company’s true value and compare it with the current market price so we can determine if the stock is worth buying or not.
When a company stock is undervalued it means that it’s selling at a price well below the value of its current and predicted cash flows.
For example a stock is selling at three dollars and 21 cents a share and you find that it’s actually worth $5 and 67 cents a share.
So this simply means this stock is undervalued and it’s a good buying opportunity because you know that the stock price will likely go up in the near future.
So you simply buy low at $3 and 21 cents a share and then sell high at $5 and 67 cents a share.
For example in this case you can make around $2 and 50 cents a share in profit at the same time.
A stock that’s overvalued is one that’s selling at an inflated price well beyond its true value or its predicted cash flows.
For example you find a stock that selling a $5 in 67 cents a share and after applying some valuation techniques you know that this stock is only worth three dollars and 21 cents a share.
So this means it’s overvalued or expensive Dubai there are chances that its price will drop in the near future.
So we simply sell it or avoid buying it.
You see value investing can tell you exactly whether or not a stock is a worthwhile investment with this information.
You can easily profit from the stock market.
So what is the smartest strategy for buying and selling stocks as a value investor will buy on bad news and sell on good news.
Do you know why.
Well most investors will do the opposite.
They buy on good news and sell on bad news.
You know that’s risky because they can easily buy an overvalued stock which likely drops in value for playing safe with the stock market.
Why don’t we wait until there’s some rumors or bad news.
These events will likely cause the stock price to drop temporarily and the stock can easily become undervalued and then we can buy low sell high for making an easy profit and similarly we’ll sell on good news because
chances are the stock price will surge temporarily during these events and sometimes become overvalued.
We simply sell at a high price and take the profit.
So here’s a quick tip if an undervalued company is financially strong with a solid profit history and promising future earnings its market price is very likely to rebound after a temporary downswing caused by investor fear or disfavor.
This means solid companies with efficient operations and strong financial performance are always winners.
We don’t care when their stock price drops because of bad news or rumors.
Their financial performance proves that they can survive market downturns and their market values will
likely go back up and reach closer to their intrinsic values.
So to be a profitable value investor All you need to do is find companies with a strong fundamental performance and invest in them for the long term.