Value investing means looking for stocks on sale. Image: Pixabay.
You're smart to consider practicing value investing, because it's an approach that has made many people a lot of money. To give you an idea, one of its greatest practitioners is Warren Buffett.
Value investing is often explained as aiming to buy assets for less than they're worth, but there's a lot more to it than that. The nine following quotations will shed more light on this method of investing.
"Price is what you pay; value is what you get." -- Ben Graham
Ben Graham was Warren Buffett's mentor, and this quote points out a critical distinction: We shouldn't think of a stock's price as its value. A $3 stock can be a greatly overvalued one, about to fall, while a $500 stock might be a bargain, about to double in the next year or two. You need to determine what a company (and, thus, its stock) is really worth and then figure out what price you'd be willing to pay for it.
"Value investing is the discipline of buying securities at a significant discount from their current underlying values and holding them until more of their value is realized. The element of a bargain is the key to the process." -- Seth Klarman
This quote adds more to the buy-undervalued-assets idea. It points out that you might only want to hold such assets as long as they're undervalued, selling once they reach or approach what you think is their intrinsic value. By seeking "the element of a bargain," you're really seeking a margin of safety, which reduces your downside risk.
"[T]he secret to investing is to figure out the value of something -- and then pay a lot less." -- Joel Greenblatt
Of course, it's easier said than done figuring out what a stock should be worth. You can spend an investing lifetime learning more about how to go about doing this. Until then, though, you might start with some simple measures such as the price-to-earnings ratio, understanding that no single tool will give you all the info you need. But to get a quick initial read on a stock's valuation, you might compare its current P/E ratio with its five-year average P/E ratio, or with the P/E ratios of its peers.
Patient value investing can help you build a big nest egg. (Image: Pixabay)
"We don't have to be smarter than the rest. We have to be more disciplined than the rest." -- Warren Buffett
This reminds us that value investing can be hard, as it's not always easy to wait for a stock to go where you expect it to go. All successful investors also need to be disciplined in not panicking should a stock or the market drop, and not being greedy should they run across a tantalizing, but seemingly overvalued, stock.
"Stocks aren't cheap and popular at the same time." -- unknown
This quote also relates to discipline, because value investors need to have the discipline and backbone to buy stocks that are out of favor. After all, that's why they're trading at a discount and offer a margin of safety. Value investors are often known as contrarian investors.
"The stock market is filled with individuals who know the price of everything, but the value of nothing." -- Phil Fisher
This is a good reminder to be wary when watching financial TV or listening to various gurus. Very often, they'll be discussing a stock's price and not the company's current or projected value.
"All intelligent investing is value investing -- acquiring more that you are paying for. You must value the business in order to value the stock." -- Charlie Munger
This points to the fact that value investing doesn't necessarily preclude other kinds of investing. Growth investors, for example, seek rapidly growing companies. Well, they can be undervalued at times, too. And growth is not the opposite of value, as even value stocks are expected to grow, and ideally not at a sluggish pace.
Charlie Munger is Warren Buffett's longtime business partner. (Photo: Nick Webb, Flickr.)
"Being a value investor means you look at the downside before looking at the upside." -- Li Lu
This is a great reminder that value investors, along with all other investors, should always give some thought to risks, and to take them seriously. It's easy to be swept away by a company's promise and potential, but look closely at how well it's armed with sustainable competitive advantages, and how certain you are of its future path. Think about all that might go wrong and factor that into your decisions, too.
"Superior investors make more money in good times than they give back in bad times." -- Howard Marks
Finally, remember that even if you learn your lessons well and become a good value investor, you'll still make mistakes now and then and will lose money on some investments. That's inevitable, though the more you learn and the more experience you gain, the less frequent or painful your losses might be. And the good news is that you're good at value investing, your gains will more than make up for your losses.
You may not grow as rich as Warren Buffett, but learning more about value investing is likely to boost your performance.
