Investing can often seem daunting for so many who would like to get started putting their money to work for them. This is due in large part to the perception that investment opportunities require a vast knowledge of financial markets built up over many years. If this sounds even remotely like you, terms like the stock market, stocks, and shares are likely to make feel a fair bit of anxiety and doubt. Thankfully, however, this need not be so. The truth is, there are several lucrative investment options and strategies that even the relatively beginner can benefit from.
About Value Investing
Value investing is one investment strategy that does not require universities knowledge of financial markets for one to benefit. Instead, by employing the very doable fundamental principles of this strategy, you too will be using the tips and tricks used by the likes of Warren Buffet and Benjamin Graham to invest based on intrinsic value and grow their wealth. These principles include the following:
– Understanding that companies have intrinsic value that can be bought and sold
– Define your margin of safety
– Rethink the efficient market hypothesis
– Lead from the front
– Be diligent and patient,
Here is how each of these value investing principles will work for you.
1. Understanding the Intrinsic Value of Companies
As far as investments are concerned, every company has intrinsic value which is often reflected in their financials. Stocks and shares are the avenues through which the average person can buy into the value of these companies. Importantly, the prices of stocks and shares can fluctuate even though the intrinsic value of the company stays steady. Also, the prices and sales for these stocks and shares are not advertised per se. As such, you will need to do a bit of detective work to find stocks and shares in stable companies that are being sold for low prices which will ensure you earn more in the long run.
2. Define Your Margin of Safety
Profit and loss when investing are dependent mainly on your ‘margin of safety.’ You are likely to profit more with a healthier margin as your margin of safety lies in the difference between the value of the stock versus how much you pay for it. So, a stock may be worth $50.00, but you bought it for $10.00. In this instance, your margin is $40.00 ($50.00 minus $10.00).
Essentially, you maximize your margin of safety by purchasing your chares or stocks at lower prices (as low as is possible) so that even if the level of growth is less than expected, you are still able to minimize losses and earn from your investment when the time comes to sell. Once you purchase your stocks, you just wait until it gets to or close to the actual (intrinsic) value.
3. Rethink the Efficient Market Hypothesis
Unlike value investors, investors who purport the Efficient Market Hypothesis believe that the prices of stocks reflect the real value of a company. However, value investors do not adhere to this hypothesis. Instead, they believe that stock prices can be priced below or above their true value. It is this true (or intrinsic) value that becomes the focus for value investing.
4. Lead from the front
Due largely to the fact that value investors do not subscribe to the Efficient Market Hypothesis, they are less likely to follow the investment patterns or habits of the general trading populace. That is, they are less likely to buy when everyone else is buying or sell when they are selling. Instead, they may be holding firm or selling when others are purchasing, for example.
5. Be diligent and patient
Finally, once you have begun the process of value investing (i.e., you have bought stocks or shares in a particular company and are now active on the stock market, you must exercise patience in order to reap your reward. Chances are you bought your stocks for prices below the company’s real value. Therefore, you will have to do some waiting in order to see the dividends from this investment. Additionally, you should be diligent in observing the market and assessing the value of your investments.