10 Key Tips for Value Investing

Value investing 17 Dec, 2018

With all the marketing out there it's tough to pick something to invest your money on. Most people follow investment trends. Sometimes it yields a good return, but most of the time it results in a bad investment. Mostly because people have easy access to information that they get overwhelmed by it. They tend to follow what the trend is and never research on what they're investing in.

If you want to secure your investments, you should put in a little bit of work. This is how the big guys like Warren Buffet and Ben Graham did it. They put in time and effort to learn the trade. Mostly they used a principle called value investing. Value investing means investing in a stock that is currently sold at less than its intrinsic/potential value. Which is why it needs time and effort as you'll be researching if shares are undervalued and could be a potential profit in the long run.

Value investing is a waiting game. It's not an instant profit. It's a process that requires patience and a lot of researching. But the outcome at the end is very worth it.

If you're unsure what to do in value investing here are 10 Key Tips for Value Investing:

1) Invest in Education

The most important thing you can do is to invest in yourself. How? By educating yourself, acquiring skills and experience. The investment you put in yourself gives you more value and that value never degrades. Investing in yourself means growth and development and it's very useful in the long run. When you know what you're doing you're less likely to fail. It gives you a better chance of success in investing. You won't get easily tricked and scammed by other people.

I have seen many ads running around about following the "experts" choice of investments. Although it may be feasible in the short run there are also many worst possible outcomes. What if that "expert" wasn't expert after all? What if the "expert" stops in investing? What if the "expert" scams you? What if the "expert" makes a terrible investment? You can only solve this by taking the lead in investing.

If you are the one doing the hard work like researching data and information, then you'll be more aware and prepared for any investing decisions and outcomes. You'll always be in the know. The more experience you get, the more you get better at making investing decisions.

2) Patience is a Virtue

If you want to do value investing, then you must know that this isn't an instant profit. It's a long process of hard work and waiting. The profit isn't instant but gradual. Value investing are usually a low-risk high reward type of investment. You're buying low for a potentially high income. But again, it takes a lot of patience to wait for the stocks to go up to its intrinsic value. It might take even years. But if you're into value investing it must also mean your into long-term investments so it shouldn't be a problem.

3) Look into the Foundation

This means look into the business itself. Their reputation, history, performance, and every aspect you can find. All of it is the foundation of a company. When you buy that stock, treat it as a part of the business. There might be very low stock prices out there but they also might have poor performance and track record. This could spell a bad outcome for an investment. So before buying a stock look into the businesses foundation first. This requires very extensive research and information gathering but it's all worth it in the end. You can start by looking into customer feedback. There are also 3rd party companies like BBB (Better Business Bureau) that host customer reviews and websites like Morningstar that provide a wealth of information. Avoid getting your customer reviews from the company itself as they might be filtering it and only show the positive ones. It's better to look at any 3rd party.

4) Buy for Quality, Not Just to Trade

It's plain and simple, buy the stocks for its quality and not for the cash it can generate you if you trade it. Along down the road, you might be tempted to buy just for trading. Although you can, you must also be sure that it can generate your profit. It's better to gamble in value investing as it's less risky.

What it means is that you shouldn't be trying off and purchase assets just because it's the trend. Nor should you try to buy assets for the purpose of trading and earning. Why? Because it's risky. A rule you should follow when doing value investing is to protect yourself from incurring losses and reduce the chance that you will ever gain losses.

5) Don't Worry Over Market Volatility

"The most common cause of low prices is pessimism" - Warren Buffett

Warren Buffett likes it when the market is pessimistic. The market gives out low prices these days. You shouldn't be afraid when the market goes down. That's the perfect time that you can buy stocks at a very low price. Most investors pull out their investments or sell off their stock because of fear. If you're value investing, you shouldn't do this.

How many market turmoil did we have already? A lot of companies are still standing and growing. Take, for example, Coca-Cola, Nike, and Apple. It's because these companies have excellent quality and management that they can get over economic turmoil. So instead of selling, you should buy when the market is in turmoil. It's probably the lowest price that you will be able to get.

6) Don't Buy Companies with Large Debts

JUST DON'T BUY - it's just common sense. The more debt business has the less likely it will be able to generate profit. ALWAYS AVOID buying stocks from companies with a huge amount of debt. To give you an idea, you should compare a company's total liability to its assets. The debt to asset ratio shouldn't be more than 1:10.

If you can, you should buy companies with a lot of assets and fewer liabilities. A typical ratio you can base it on can be 1:50. This is what most investment services usually advice.

7) Study a Lot of Charts and Graphs

You're gonna be checking on a lot of information and the most easily interpreted is a chart or graph. You'll be looking at many of them just so you can evaluate if an investment you're gonna make will be beneficial. Just like the information in Tip number 6. You'll be looking at assets, debts, liabilities, management, history, and many more of them.

You need to do this because it's the way you can study the company, it's a track record, it's performance. You need all the information you can get to get an indicator if it's gonna be a good investment.

8) The News is Your Source of Information... To a Certain Extent

Your daily news is an excellent way to observe market state. If you look at Morningstar.com, you can see the latest news articles for each stock. Whenever bad news comes up, usually the majority sell their stocks. That's the perfect time to buy. But you also have to do your research. Example: a company's revenue has just gone down, but that company has been operating for almost 50 years. Do you expect that company's revenue to go low without coming back? I don't think so. It had withstood 50 years and it should be able to recover. That's why news is an excellent source of information… for a certain purpose.

9) A Good Management Will Yield Good Results

A business is run by people so you should know the people who are running it. Find out their background, track record, what company they previously worked on, their accomplishments and achievements, and their credentials. There are many things you will look into, but if you learn them then you'll know if the company will perform well.

10) Buy a Company that Pays Dividends

While you wait for your stocks to go up in value, you can collect dividends. It can get very tedious and pressing when you have to wait for a long time. But with dividends, you can have some sort of activity while you wait for your stocks to increase in value.

Conclusion

Value investing is a method of investment that successful investors such as Ben Graham and Warren Buffett follow. It has been proven as a low-risk high reward way of investing. Do remember that in investing, the best gamble you can do is to bet on yourself. You should be confident in what you decide and be well prepared and equipped before you go into value investing.

Further Reading

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