In a nutshell, value investing is about buying undervalued stocks of strong companies and holding them over a long period of time. Patient, diligent investors have seen a lot of success with value investing. When you have gathered a considerable amount of information on the company you’re investing in, it reduces risk and gives a lot more understanding.
After performing a lot of fundamental analysis, you decide to purchase stock in a company. The five must-have metrics are the price-to-earnings ratio (P/E), price-to-book ratio (P/B), debt-equity ratio, free cash flow and the price/earnings to growth ratio (PEG). There is a lot of focus on the long-term growth potential of a stock. Strong value investors additionally look to buy with a margin of safety.
[This is a guest contribution from Vinayak Maheswaran]
Books to read
Value investing was a concept that was established by Benjamin Graham and David Dodd who were professors at Columbia Business School. The following two books are a great introduction to value investing for beginners. The Intelligent Investor by Benjamin Graham is a book that many value investors read cover to cover. It has all the information necessary for a value investor to succeed in the markets.
The 1934 book Security Analysis by David Dodd and Benjamin Graham is another work that galvanized value investing. It is considered to be the longest running investment text ever published. The book was written after the Wall Street Crash of 1929 that almost wiped out Graham. It has some very important pointers for value investing students to take note of.
Three principles to stick by when doing value investing
- Do your research
Take the time to analyze the company you are considering to be a good investment. You should know the company’s long-term plans, business principles, financial structure and the management team. [click to continue…]