The investment strategy that proves most effective in the market is value investing. It has become widespread because of the successes Warren Buffett achieved using this. The founder of Berkshire Hathaway reaped billions because he adheres to the principle made popular by Benjamin Graham; to buy stocks when they are discounted from their true intrinsic value.
Value investing singles out stocks or bonds undervalued greatly by the stock market. However, this is entirely different from a cheap investment. An undervalued investment, although bought at a lower price, still contains a high value because of its selling potential.
Many value investors make use of blue chip stocks as their key tool in value investing. According to the New York Stock Exchange, a blue-chip stock is a stock with a reputation for reliability, quality, and has the ability to work profitably well in good and bad situations. It becomes the ultimate embodiment of a value investing strategy. The investors eye these companies when the stock prices fall greatly to make it a undervalued.
Investors have more chances of success when they focus on companies trading at low prices but with high intrinsic value over those whose sole focus are on high-growth stocks.
However simple this strategy may seem, there are things that investors should always be wary about to maximize the potential of value investing.
1. Value for time. Patience is a good market strategy because trades that are well-executed have time invested. It is known that value increases over time, and when an investment is given much time to grow then an investor will definitely have a huge return. No one can expect an overnight return of investment, but playing the stocks patiently will definitely produce profitable outcomes.
2. Safe market. There is little risk to value investing since investors don’t wait for the right time to sell or buy stocks. Investors are only concerned with how cheap or expensive an item is, such that changes in the market will not influence inappropriate decisions. The good thing about value investing is that it is a safe ground for reluctant players, or to those who just want to be safe.
3. No technical analysis. There is no need to delve on the companies and how their stock prices move in the market. Value investing involves fundamental analysis instead – doing proper research and due diligence into the discovering the true intrinsic value of a company.
When used properly, value investing provides a simple yet effective method to manage risks and improve return. No one knows who will become the next Mr. Buffett, but before becoming one, it is wise to get familiar with all the risks and benefits of this certain strategy. It is always the educated investors who will reap good returns in the end.