What Value Investing Strategy can I use to Start Investing in Stocks?
In this answer we’ll talk about the complete value investing roadmap so you know exactly your next steps are and what you need to do to become a successful value investor.
This strategy can be used by anyone who is just starting out to begin investing in stocks at a discount and begin making profits.
First we’ll look for companies with a strong financial and operating performance.
What we want to do as a value investor is to make sure that the company we’re investing in has enough capacity for maintaining its operations profitably. As well as having an ability or strong economic moat to compete with its rivals in the same industry.
You can evaluate if a business is financially strong, or not.
By looking at some financial ratios and performing a financial statement analysis you’ll need to look into your company’s balance sheet income statement and cash flow statement to find out what’s behind the numbers.
And when you have found a solid company the next step is vitally important because it is the basis of the value investing formula. You’ll need to make sure that it’s undervalued.
You can easily determine if a stock is undervalued or overvalued by performing a stock valuation based on some method like the discounted free cash flow model.
After estimating a company’s intrinsic value you simply compare its intrinsic value with the current market price.
If the intrinsic value is greater than the current market price, the stock is considered undervalued. And on the other hand when the intrinsic value is lower than the market price the stock is overvalued.
It’s as simple as that. Always make sure you’ll apply a margin of safety to make sure that you’ll actually buy an undervalued stock.
However knowing your company’s intrinsic value is not enough.
That’s because you’ll need to find the best opportunity to buy it.
A great company can easily end up being your worst investment when you buy it at the wrong time. And that’s why technical analysis is essential in your value investing system.
By utilizing technical analysis you’ll know exactly when to buy your stock to maximize your profit while reducing your risk.
The final step is sell your stock when it becomes overvalued again.
You can determine the best time to sell for maximum profit by using both stock valuation methods and technical analysis.
So that’s the three simple steps you’ll need to follow.
Now let’s talk about the roadmap for mastering the Value Investing technique.
I’ve been a value investor for seven years now and here’s what I’ve learned to become a master, to become a profitable value investor.
First and foremost you’ll need to learn all the best value investing strategies to find solid and financially strong companies to invest in.
That is to say you’ll need a system. You’ll need a set of investment criteria for evaluating and picking undervalued stocks. By having a system like that you can make sure that all the companies you choose are rock solid companies and you can easily automate your stock analysis and valuation process.
You can either build your own system or simply follow or copy and paste a value investing system after knowing all the strategies that actually work. You’ll need to enhance your expertise of course, so you can understand better all the businesses that you’re investing in.
You’ll need to learn more about financial ratios and how to read and analyze a company’s financial statements.
If you’re an accounting or finance student when you are in college you might have gotten familiar with these topics.
But if you’re not a finance person learning these topics may be a little bit harder for you, but they are essential if you want to be successful as a value investor.
So learn it well.
Next you’ll also need to learn more about stock valuation.
At least you should master how to use the discounted free cash flow model so you can project future cash flows of a company and estimate its intrinsic value. And when you’re done with the intrinsic value things will become much easier. It just takes a little practice to get this right.
Your next step is to use technical analysis to determine the best time to buy and sell your stocks by using technical analysis you simply look at a stock chart and determine current market trends and predict the future movements of your stock.
You’ll need to look at some technical indicators in oscillators like the moving averages, the RSI, the Bollinger bands volume, the Mac D, etc. And you can also look at chart patterns and candlestick patterns so you can predict if your stocks price will go up or down in the future.
And the final thing, you’ll need to develop a strong winning mindset and learn about trading psychology.
You also need to know what affects the price of your stock and how to trade at minimal risks. How to reduce risks on your investments by placing a stop loss etc..
So that’s everything it takes to become a profitable value investor.
You know value investing is a big subject and it does require some kind of expertise.
A lot of work and patience. But if you learn it well, value investing will eventually pay off.
I promise you that.
Imagine you can grow your investments by at least 15 to 25 percent a year by just following a simple system that you can create on your own. That’s much easier than putting your money somewhere else like in the bank or your 401k and IRA that generally pay you nothing in return or a small fraction of the return you could have made.
So welcome to the value investing world.
I believe you can do whatever it takes to become a better investor and you can change your financial future.