Value Investing

Value Investing


Value Investing players aim for undervalued stocks in the stock market, hoping to buy low, and sell high. But to many people, Value Investing is a mystery. However, if you can find bargains at a shopping store, then you have the necessary skills to find value stocks.

A bargain at the supermarket is a high quality item at the cheapest price. This is also the value stock investing strategy. This strategy relies on your willingness to study carefully the fundamentals of the companies finances.

This is also known as fundamental analysis.

Stock fundamental analysis is a strategy of knowledge and patience. A value investor tries to find companies that have solid fundamentals and display promise for continuing to maintain those strong numbers into the future. Part of the job is discovering companies that may be undervalued by the markets.

And the other part involves holding on to those stocks for the long run, without getting scared off by occasional short-term dips in the price of the stock.



Probably the most famous value investor is Warren Buffet. Buffet is chief executive of Berkshire Hathaway and is one of the most successful investors in history. In 2008 he was ranked by Forbes as the richest person in the world with an estimated net worth of approximately $62 billion.

In the early part of his career at Berkshire, Warren Buffet focused on long-term investments in publicly quoted stocks, but more recently he has turned to buying whole companies. His mentor, in fact, was the "Father" of value investing, Benjamin Graham.



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Value stocks have the following characteristics:

  • low stock price to book value

  • low stock price to earnings (P.E. Price Earnings Ratio)

  • higher than average dividend payout


Low stock price to book value:

To obtain this, divide the total value of a companies assets (as shown on its financial books) by the number of its outstanding shares available. To derive the book value per share, divide this number by the market price of one share of the company's stock.

Low stock price to earnings (P.E. Ratio):

Divide a company's earnings (from it's financial books) by the total number of outstanding shares to derive its earnings per share. Divide this number into the current price of the stock to calculate the P.E. This ratio gives you an idea of how expensive a stock is in comparison to its current earnings.

For example, if a stock was priced at $100 and had a dollar's worth of earnings per share, then the stock would be trading at 100 times this year's earnings. Companies trading at less than 10 times earnings, may be bargains.

Higher than average dividend payout:

A dividend is any cash a company takes out of its earnings to pay to shareholders. This is usually paid quarterly in the form of a cheque. The dividend payout ration is measured in percentage, and is calculated by Total Dividends issue divided by net income for the same period.

And what is an average percentage payout? Hmmm...that's a relative question, and it depends on the current market environment we are in at the time. 2 to 3% could be considered average.



To increase your odds of finding a value stock, it's wise to buy companies that you understand. Warren Buffett takes this approach. Companies that you understand will most likely be those in industries you have worked in or sell consumer goods products that you are familiar with.

If you've worked for a biotech company for several years, you probably have a better-than-average understanding of the biotechnology business. And if you buy basic items like cars, clothes, appliances and food, you know a thing or two about consumer goods.

Well known investor Peter Lynch strong advocated such a strategy whereby retail investors can outperform institutions simply by investing in what they know before Wall Street catches on.

Another strategy that value investors favor is to buy companies whose products or services have been in demand for a long time and are likely to continue to be in demand.

Looking at stock quotes won't tell you which companies these are – you'll have to do some critical thinking. Of course, it is not always possible to predict when innovation will make even a longstanding product or service obsolete, but we can find out how long a company has been in business and research how it has adapted to change over time.

At this point it may be worthwhile to analyze management and the effectiveness of corporate governance as well as its financial statements to determine how the firm reacts to changing business environments.



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Buffettology

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Buffettology In her book The New Buffettology, Mary Buffett, former daughter-in-law of legendary financial genius Warren Buffett, and a successful businesswoman in her own right, has teamed up with noted Buffettologist David Clark to create Buffettology.







The New Buffettology examines Buffett's methods for valuing companies and selecting stocks--it even encourages you to buy a calculator and work through the valuation formulas that Buffett uses when researching companies to buy. The book not only serves as a useful guide to understanding how Buffett invests, it's an excellent primer to investing in stocks, whether you plan to become a Buffettologist or not.


There is also an Buffettology Workbook to help you along in becoming a value investor.



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Jim Cramer

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TheStreet.com 160x600 Action Alerts Plus The most well known fundamental stock valuation analysis guru today is Jim Cramer.

Jim Cramer shows how to compare stock prices in a way that you can understand, how to spot market tops and bottoms, how to know when to sell, how to rotate among cyclical stocks to catch the big moves, and much more.

Jim Cramer's book Real Money is filled with insider advice that really works, information that Cramer himself used to make millions during his fourteen-year career on Wall Street.

Jim Cramer is America's #1 financial guru and stock valuation fundamental analyst. Every day he advises investors on how to get ahead of the markets and stay ahead on his daily television show, Mad Money.

Jim Cramer is also co-founder of The Street.com, the exciting financial news Internet Web site that has become one of the most trusted news sources-and the go-to investment site-in the world of finance.

His books have all been national bestsellers and have helped educate hundreds of thousands of investors about the perils and promises of the financial markets.


How would you like to gain Full Access to Jim's Personal Portfolio — And he'll Email You Before he makes the stock trade!

In an effort to serve you, Jim Cramer created a service called Jim Cramer's Action Alert Plus, which allows you to follow along as Jim make his own trades.

As an Action Alerts PLUS subscriber, you'll get the following:

  • Open Access To Jim's Personal Portfolio - Let him and his research staff do the stock fundamental analysis legwork for you. He'll give you 24/7 access to his portfolio, so that you can access all of Jim's recommendations and activity directly from any computer.

  • Action Alerts Emails - Jim will tell you why he is making each move so that you can learn his rationale and become a better investor yourself.

  • Weekly Roundup - He'll send you a Weekly Roundup that summarizes the week's activity and gives you a chance to jump on top stocks.


Join Jim Cramer's Action Alert Plus, as you and Jim take on the market together each day.

Jim Cramer states:

"I'll be as transparent as I can be and you'll be able to take advantage of actionable suggestions that will lead to potentially profitable results."



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So what do you think, is Value Investing a right fit for you and your personality?




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