Ever had a go at the stock market, only to find it didn’t turn out exactly how you hoped?
Warren Buffett, along with many other investment gurus, waves the flag high for value investing. It is a simple approach of identifying unloved stocks, buying them at a significant discount and holding onto them until their share price reaches your target exit point. Perhaps now you are looking for a safer, more secure investment approach that will still generate decent returns? Well, look no further than value investing.
Personally, I have learned a few valuable lessons since starting my journey as a value investor and would love to share some strategic tips with you.
1. Never lose money
Warren Buffett follows two rules. Rule one: Never lose any money. Rule 2: Never forget rule number one.
The stock market can be a wonderful wealth creation instrument if you invest purposefully. Your goal is to never lose money. It is easier said than done, but if you invest according to these investment rules, you will think twice before buying or selling a stock. Refrain from making losses by applying the intrinsic principles of a successful value investor.
2. Avoid speculation
Speculation may result in a lucky profit. But it more often than not lands up in a hefty loss, breaking the first rule of not losing money.
Value investors use fundamental analysis to determine the value of a company’s shares. The goal of analysing the fundamentals of a business is to answer the following questions:
· Is the company's revenue growing?
· Is it making a profit?
· Is it in a strong-enough position to beat out its competitors in the future?
· Is it able to repay its debts?
· Is management trying to "cook the books"?
· Is the company’s shares trading below its intrinsic value?
The foremost reason for doing such an analysis is to determine whether a company’s shares are trading below its intrinsic value. If a company fundamentally aligns and its shares are trading at a discount allowing for a margin of safety, you should consider buying its stock.
To learn how STRIDE incorporates fundamental analysis in its stock-picking process, click here.
3. Don’t forget a margin of safety
A margin of safety is the difference between a stock’s intrinsic value and its price when trading significantly below its intrinsic value.
Investing with a margin of safety is important because it provides room for error. Mistakes happen, especially when doing sophisticated calculations. When your judgement of a company is wrong, the margin of safety acts as a barrier to protect you from any major losses.
4. Invest in value, not dividends
Don’t get me wrong, I love dividends, but your entire investment strategy should not revolve around them. The reason I say this is because dividends offer no guarantees. When a company is in trouble, it may slash its dividends.
I recommend that you invest in value and not in dividend yield. Regard dividends as a bonus to buying into a sound business. Ideally, you want to invest in a strong company that also offers a dividend - one with continued revenue growth and the ability to sustain and even grow its pay-outs.
In a previous article, I discussed five thoughts to consider before buying a dividend stock. Click here to view the article.
5. Ignore Mr. Market
Mr. Market is a fictional character created by Benjamin Graham and introduced in his book “The Intelligent Investor”. He is a hypothetical investor, driven by panic, euphoria and apathy. His approach to investing relies heavily on his mood and emotions rather than on the fundamental aspect of a business or investment.
According to the mood of Mr. Market, stock X’s share price will be flying one day and worthless the next. In essence, the metaphor of Mr. Market is used to showcase the irregularity of the market.
Do not stress about market fluctuations. By fundamentally analysing companies, you understand the value of their assets, eliminating the need for overly hasty moves. You only need to react when the market reaches your preconceived consider sell or consider buy price. The rest of the time, you can sit back and relax, while the market does all the work for you.
6. Become a value investing bookworm
What is Warren Buffett’s secret to success? Reading. The man spends 80% percent of his work day with his nose buried in research material.
If you strive to become a savvy value investor you have to read constantly. Commit yourself to reading and you will see your knowledge growing like compounding interest.
No time to read? No problem. I've put together a list of value investing podcasts you can listen to when you are challenged for time.
Value investing can be a simple, yet fruitful investing strategy if you think and act strategically when investing. Read our past blogs for the top 20 Benjamin Graham quotes on just this. If you have any additional tips, please share them in the comment section.