For most, investing can be quite intimidating. We automatically associate it with numbers analysis, huge capital, high risks, and time requirement. For some types of investing, this holds true. But for value investing, it’s the opposite.
Don’t get me wrong: value investing is also about stocks. However, it calls for investing in stocks that are considered “undervalued” or “underappreciated.” This includes stocks with share prices that are lower than what they’re really worth.
It’s like seeing potential in someone who doesn’t talk much but accomplishes a lot. It’s like buying a good pair of shoes at 50% of its original price. It’s like finding a treasure that somebody threw out.
We know it can sound complicated at first, but there’s a method to actually measure the value of stocks and guide your decision to invest. Plus, it can be done by anyone regardless of age, industry, profession, experience, or capital.
If you still need a nudge, here are five reasons why value investing works for you, your friends, or your family.
1. It does not require complex numbers analysis
All kinds of investing are about growing our money. And money is all about numbers.
Value investing is not an exception. We still have to learn and analyse numbers to compare the stock’s value and its share price. It is, fortunately, not that complicated.
First, we have to establish what stocks are.
Stocks are businesses. Hence, when we invest in a stock, say $SHENG SIONG GROUP LTD(OV8.SI)$ or $Domino's Pizza(DPZ)$, we buy a share and we become one of the business owners or shareholders.
In value investing, we look for businesses with a low share price but with great potential for growth in the future. Thus, we are more concerned about business fundamentals rather than the stock chart.
Yes, business fundamentals include numbers because we’ll need to look at financial reports. We have to check if the business has consistent profits, positive cash flow, and low debt, as these will tell us if the company is healthy and has great value.
Before you feel discouraged by these financial terms, know that you personally have and review these numbers regularly, either consciously or unconsciously. If you receive and spend money every month, you have your own revenue and cash flow.
Besides, numbers should not concern us that much. Understanding the value of a stock only requires us to analyse 30% numbers. Equally important is checking the company’s management and business model: Are they competitive enough? Is the management performing well? Is the business likely to survive this pandemic?
In value investing, it’s a balance of quantity and quality. So even if you have little knowledge of finance, you can still make an informed decision about a stock.
2. It does not take too much of your time
Some people do daily stock trading. Their typical day starts at 9:30 in the morning when the market opens, and their whole morning is focused on waiting for stock prices to go up or down so they can either buy or sell. Sounds exhausting, right?
Value investing isn’t like that at all. Once you’ve determined and bought a value stock, you need not monitor it day by day. You only have to wait until the next release of the company’s financial report or press release, which is usually out quarterly or half-yearly depending on where they are listed.
You don’t need to buy or sell every time the market changes. You can just revisit your portfolio once a year to re-assess a stock. In fact, in value investing, we don’t pay attention to the market noise 99% of the time.
This is because we hold on to the business and we understand that its fundamentals are strong enough to withstand short-term changes in the market. Hence, your time and energy aren’t compromised as you let your money grow.
3. Everyone knows a business with strong fundamentals
Stocks are businesses, remember? And we all know a lot of businesses, both local and international. We buy from them. They earn money from us.
Every day, we consume things we need and want, be it food, software, clothes, shoes, or membership. Think about the products or services you’ve been consuming in the last five years or so. Think about those you think you’ll still consume five years from now.
Businesses with strong fundamentals are those that have grown through the years and are expected to still grow even more in the long run. These can also be companies that have just started but are showing outstanding potential.
So you can’t tell me you don’t know any stock to invest in. Look around you. What are the companies you favour? Which brands do you prefer? What are the businesses you and everyone around you cannot live without?
4. You don’t need to invest in a lot of stocks
In stock trading, the recommendation is to “avoid concentrating on only a few stocks.”
Value investing has a different direction altogether. As much as possible, value investors only keep a few stocks in their portfolios.
Experts recommend beginning with no more than ten stocks. This way, it’s easier to monitor. After all, you wouldn’t want to keep track of the performance of 30 businesses, would you?
Moreover, when you hold a limited number of stocks, you’re not overwhelmed whenever you find your assessment of a company is wrong and you need to minimise your loss.
5. You can learn value investing online
We’ve established that everyone can do value investing provided they have the willingness to learn how to identify a stock’s value and the drive to begin their investment journey. We understand, however, that some may still be hesitant to start as they don’t feel ready.
We get you. Most successful investors, including Warren Buffett, first equip themselves with relevant knowledge before starting, because the market can be complex and overwhelming for newbies. They do this by looking for qualified mentors to teach them.
Value investing can only be intimidating if we don’t know how it works. If you’re determined to be a successful value investor, you’ll jump on board and set sail.
Best of luck on your value investing journey!
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Disclaimer:
All facts and opinions presented are for educational purposes only. This is not a recommendation to buy or to sell. Please do your own due diligence.
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