Markets: Time for 'value investing'?
Source: EM
After the carnage witnessed on the first trading session of the week, the markets displayed immense volatility yesterday, yet managing to close in the positive. The pressure was triggered by apprehensions regarding the Fed continuing with its stance of raising rates, which could have a restrictive effect on global economic growth.
This makes us reaffirm our belief that investing is a long-term game that requires not only skills but also patience. The factor, which separates investing from speculation, is the well thought out planned approach for deploying funds which speculation lacks. Speculation is about maximizing your return in the shortest time (though undertaking high levels of risk), while investing is all about garnering adequate returns from a well thought out investment strategy.
Various investment styles have been popularized to beat the street in the past. One of the most popular styles, which date long back, is 'value investing'. Benjamin Graham, the father of investing, popularized this style of investing, which is the method of picking up undervalued stocks and holding them over a long-term. The value of the stock is worth the future cash flows (that can be taken out of business) discounted to the present value. Simply put, value investing means (attempting) to buy 'something' for less than it is real worth.
Parameters of value stock selection Good value means buying of shares of companies, which have low price earnings ratio, high asset backing, high dividend yield, robust business model and clear and visionary business mission. The management creates value through its policies. Thus, value investing dwells into all aspects of business and tries to visualize the impact of business policies on the earning potential of the firm.
Value investors also look for bargain prices (priced low for temporary or irrational reasons, under-priced in relation to the company's potential). According to Benjamin Graham, value investing consists of patience, common sense and in-depth analysis of published information. It also involves contrarian investing, which says - 'hunting when hunters have left.' Value investors look at margin of safety. They look at buying stocks at maximum discount possible on their intrinsic value. Though the subject of intrinsic value is a matter of subjectivity. Value investing involves separating emotions from investing and investing on a common-sense basis. The investors following value investing ignore market sentiment, short-term swings and other factors affecting stock prices.
Thus in conclusion, you, as an investor, need to compare intrinsic value of the company as a whole to its current market capitalization. Success will, however, depend on skill in accurately determining the intrinsic value. It can also be said that to be a good value investor, one needs to harness the qualities of a contrarian investor, a patient investor, a rational investor, an analytical investor, and above all, a long-term investor.
Just make sure to buy stocks when they are cheap and you will do ok in the long run.
According to research by Eugene Fama and Kenneth French, the capital gains from value stocks are mostly due to convergence back to the general market values.
I doubt most people will do better than by investing in the pure value ETF's from Rydex.
Posted by
Market Participant |
2:32 AM