When it comes to financial planning, we can broadly be compared to one of three animals: the ostrich, the meerkat or the beaver. Which one are you and which one’s the best?
Actually, it's a trick question. Whether you stick your head in the sand and hope tomorrow will finance itself, are always on the lookout for investment opportunities but can never quite decide what to go for or like to carefully construct something watertight, the principles of value investing can work for everyone.
It's a jungle out there
It's not surprising that many people feel daunted by the idea of investing, but increasingly our future financial security depends upon us making investments of one type or another. The markets are a confusing jungle, apparently ruled by vicious bears or bulls, chattering with the foreign language of financial jargon. What chances of survival does a small, private investor have in such a daunting world?
Remember two things: size isn't everything and, as the song goes,'it ain't what you do it's the way that you do it.'
Small doesn't mean weak in investing. Principles give an investor way more strength than the amount of money he has to start with or how well he understands financial-ese. Personality type doesn't matter either.
Value investing principles are the strongest of all because they help any investor select better opportunities. Value investors completely disregard the latest rumours banging out on the jungle drums, herd mentality driven by trends, panic over share prices or any flamboyant shows of corporate feathers that could mask underlying failings in a business.
Yes, the markets can be cruel and people have lost a lot of money. But value investors aim to reduce their risks as much as possible. We only invest in businesses that demonstrate real strength through analysis of fundamental data, are being sold at a discount and we time the buy in and sell out for maximum returns.
Nothing is 100% safe in the wild world of Wall Street. But whatever your reason for investing - college funds, retirement security, yacht - your nest egg has a much better chance of flourishing tomorrow if you adopt these principles today.
Value investing has been around since the 1930s. Great academics have spent decades writing about it, each refinement adding to its strength. The latest evolution of this technique is 3D value investing, which adds brand new dimensions to bring investors more clarity than ever. While the actual processes involved are undeniably complex, the principles behind the technique can be simplified to three main points:
- Value investors always purchase stocks which are trading at a discount to what we believe the value should be. We use fundamental analysis to select strong, healthy businesses. Timing is key – the trick is to buy weak and sell strong. Once we have bought into such a business cheaply we continuously monitor the stock to ensure the business is still headed in the right direction regardless of the share price. The key benefit to this step is that our risk reduction is built in at the point of purchase.
- Value investors look for a margin of safety, as above, and diversify their stocks to lower risk. The strongest value investors understand that investing globally gives you a natural hedging strategy that traverses geographies and currencies. If, say, war breaks out in one country and stocks fall, your investments in other territories will help mitigate any losses incurred.
- Reinvesting returns and dividends maximizes the effects of compound interest and accelerates investment growth. Remember, we are in this for the long term. Keep your personal reason for investing firmly in your mind and give yourself a minimum of three years to see your money start to grow. This is the ultimate game of patience but it’s worth it.
Great expectations, great returns
Share prices go up and down but careful selection of investment opportunities mean the value investor shouldn't fear a market dive. A bad day in the market can be great for us because strong companies lose value as well - so we can buy them at a great price. Once the market corrects itself and prices rise, we see our profit.
While there is always an element of risk in investing and occasionally strong businesses do crash, we are not worried by daily price fluctuations because we are in this for long term gains. Panic is a poisoned dart that we take great pains to dodge. Seeing a share price fall leads potentially good investors to sell out at the wrong time every day. They think they are cutting their losses by bailing but if the business is strong it should prevail in the long run - and what they are really cutting is their gains.
Staying calm and trusting the principles that lead you to select your value investments in the first place is what really pays off. We expect 17% compounded annualized returns and that’s what we get – consistently. To put that into perspective, that means we’ve outperformed the NASDAQ, S&P500 and the Dow Jones. Warren Buffet and thousands of other successful independent, international investors are more living proof that value investing works.
How to get started today
The world is now the value investor’s oyster.
Set yourself up with a good online bank and trading platform to start with, shopping around for the best deals in transaction fees to keep your costs to a minimum.
Select a great stock-picking and portfolio management tool built around the principles of value investing. This is going to be your biggest ally in your investing career so take your time selecting one that is right for you.
Key features to look for include:
- A wide reach of businesses, sectors, currencies and geographies to maximise diversification and reduce your risk
- Clear and comprehensive company information displayed in multiple ways for a truly transparent, 360 degree view of the businesses you’re going to invest in
- Great portfolio management with both summarised and detailed views of performance status
- A means of tracking businesses that interest you for future investments
- Valuations calculated according to value investing dimensions using full fundamental analysis spectrum for accuracy
- Back test evidence to prove future forecast ability
- Simplified scoring and rating systems for snapshot evaluation of company strengths and weaknesses
- Affordable subscription to keep fees to a minimum
Planning for a secure financial future is something we should all be doing and value investing offers the best potential for great returns.
Don’t wait to invest: invest, monitor, reinvest and (one day) sell.
Big banks and financial firms leads you to believe you have no choice but to employ their services to invest your money successfully. The truth is you can invest your own money – and in doing so – earn more profitable returns without paying hefty management fees.
Learn how to do so in our free eBook. Download it now!