You reach a stage in life where most dinner parties with friends end up in conversations about investments. Your friends boast about their gains and dividend pay-outs, which stocks they bought or sold, etc., and all you want is to get in on the action. But which investment strategy will suit your desired needs and achieve your financial goals?
If you are looking for secure, low-risk investments that deliver long-term, steady returns, I recommend following a value investing strategy.
Besides the power of generating handsome returns, this investment approach holds multiple benefits.
1. You don't have to be a rocket scientist
The principles of value investing are straightforward:
1) Buy undervalued stocks with an economic moat
2) Buy with a margin of safety
3) Hold your stocks over the long-term
You can invest well without a financial degree. Warren Buffett is famously quoted: "You do not need to be a rocket scientist. Investing is not a game where the guy with the 160 IQ beats the guy with 130 IQ". Contrary to popular belief, intelligence does not make you a great investor. Investment success is predominantly attributed to your level of patience.
All you need to become a successful value investor is the ability to read, have patience, the willingness to learn, the attitude to succeed and a trusty calculator.
2. It leaves no room for emotions
This benefit is the top differentiator between value investing and other investment strategies. Emotional decision-making is the downfall of the majority of investors. They tend to make hasty decisions based on the condition of the market, trusting their gut-feeling rather than data.
Value investing eliminates emotion from the equation by relying solely on data gathered through the process of fundamental analysis. Buying shares in a strong business with growth potential will deliver positive returns, in the long run, regardless of the number of dips it takes in the short-term.
3. The proof is in the pudding
The results of value investing speak for itself. Warren Buffett managed to turn US$6,000 into US$70 billion using this long-term strategy.
Historically, global markets have grown over the long-term. Globally, markets experience ups and downs. It is natural and nothing to stress over. If you ride out the waves of fluctuation, you will end up growing your wealth. Buffett once said: "Over the long term, the stock market news will be good. In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497."
4. The 8th Wonder of the World: compounding interest
Taking advantage of compounding interest is yet another wonderful benefit of value investing. By reinvesting your returns and dividends, your investments will grow phenomenally. You will earn interest on top of interest.
In due time, you will witness the difference reinvesting your returns have on the growth of your portfolio. The best example of the power of compounding interest is Warren Buffett’s career.
5. Assured sweet dreams
Investing in the long-term will allow you to sleep like an angel. You don’t have to worry about waking up at the opening bell every morning to decipher your portfolio’s performance. Buying and holding stocks, take off the pressure of worrying about sudden market peaks and troughs. With a value investing strategy, you can rest assured that you will be making your money over the long-term.
6. It is easy to correct your investment mistakes
Value investors always invest with a margin of safety. The stock market offers no guarantees. We are merely humans prone to making mistakes, regardless of the amount of research we have done. Value investors recognise this and prepare themselves for the worst by investing with a margin of safety. Say you made a slight calculation mistake in the value of a company, you have the benefit of correcting the mistake without suffering tremendous losses.
7. Avoiding the tax man
How do you avoid paying investment fees? By staying in the market. Holding your assets incurs no fees, no taxes and actually reduces your tax rate.
With a long-term investment strategy, the tax man does not come knocking at your door every so often as with short-term traders. You can benefit from a reduced tax rate on your profits if you hold your assets for longer than a year.
8. Commissions are an afterthought
Investment activity is expensive. The more you buy and sell, the higher your fees will be. For value investors, predominantly holding their assets and keeping trades at a minimum, paying commissions does not have a noteworthy effect on your portfolio’s performance. By maintaining a low level of activity, you avoid running the risk of outweighing your gains with unnecessary fees.
9. Less volatility
Your risk significantly lowers when investing with a margin of safety and eliminating emotion. Staying in the market reduces the risk of incorrectly timing the market. Trying to time the market is a strategy no one should ever pursue because it is akin to gambling. Timing the market will lead to you missing out on valuable gains and overall financial goals.
With all the benefits of investing for the long run, it is impossible not to become a value investor. So what are you waiting for? Become a value investor today, so next time a conversation about investing comes up, you won’t be sitting twiddling your thumbs, but rather bragging about your market-beating returns.