7 Things that Make Value Investing Successful in the Long Run
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There are two types of stocks, growth and value stocks. The former are stocks that offer a growth rate above the average, while value stocks are undervalued stocks. Surprisingly, value investing is an often ignored area of investing that not many individuals like to venture into. By definition, value investing refers to purchasing stocks when are they are below their actual value and holding them for the long run. Value investing is a lot like buying something at a discount. However, there is still a lot of skepticism and hesitance surrounding it. So, before you decide to invest in value stocks, you must know what makes these stocks a profitable option.
Here are 7 things that can make value investing successful in the long run:
1. Keeps the financial anxiety out
The fear of fluctuating prices can be a cause of worry for many people. Value stocks are undervalued at the time of purchase but they are built to perform better in the long-term. Many investors commit the mistake of selling their stocks at the slightest shift in the market. But it is essential to hold your stocks for a relatively larger time frame. Keep in mind that the market will continue to fluctuate but this should not be a reason to panic.
2. Does not require active and aggressive investment practices
Since the stocks are bought at a low price, value investing requires very little capital to begin with. You can start investing in value stocks at a very early stage in your career. This also allows more time for the power of compounding. Moreover, since this is a long-term investment approach, you do not have to be bothered by short-term market volatility. Value stocks are a simple form of investing that need little to no intervention. However, it is important to know that value stocks are ideal for goals set in the future. If you are investing in such stocks with the intention to cover immediate or mid-term goals, this approach will likely fail. One of the most necessary virtues of a value investor is patience.
3. Works on the principle of the margin of safety
The margin of safety refers to the difference between the actual or intrinsic price of a stock and the price at which you buy it. For instance, if a stock’s current cost is $5 and its intrinsic value was $7, the margin of safety for this stock is $2. The higher the margin, the more beneficial is the investment. As a value investor, it is crucial to find and put your money into companies that offer a good margin of safety. It is also vital to differentiate between a company that shows potential in the long run and one that is simply showing signs of downfall. It can help to conduct thorough research and understand the past and current financial standing of the company before buying any stocks. You must focus on the company’s long-term plans too. You can also consult a financial advisor in this regard.
4. Focuses on the business and not the stock
One of the primary factors that make value investing successful is that it is centered on the business rather than the stock. Value stocks are relatively unphased by the happenings of the stock market. The returns from your investment will depend largely on the performance of the company. While you may find looking up companies a time-consuming process at first, you will end up saving a lot of time that is otherwise spent on buying and selling of shares in the stock market.
5. Does not require diversification
While most other forms of investing stress upon the need for diversification, value investing is a little different. Opportunities for value investing do not come by as quickly as others. On most occasions, you will invest in value stocks and have to wait several years for the power of compounding to generate good returns. Hence, financial experts suggest buying large amounts of undervalued stocks at once, even if they are of the same company. While this may be seen as a high-risk move in traditional investing, it is usually encouraged in value investing.
6. Dwells on the reputation of a company
Unlike the share market, value stocks are more driven by the management of a company rather than other market forces. Finding a company with a competent team of managers can be a foolproof way for you to ensure favorable returns later. Understanding a company’s core principles, management styles, and credibility can enable more successful investment decisions.
7. Offers low risk and costs
Value investing is a relatively low-risk strategy. Value stocks are not impacted by price fluctuations, supply, or demand. The need to time the market and buy and sell stocks frequently is also removed from the equation, thereby reducing the overall risk component. Moreover, the taxes and costs incurred in value investing are also a lot less than short-term investing.
To sum it up
Value investing is a great strategy for passive investors who do not have the time and interest to time the market periodically. They require very little attention and you only need to look at the market when you buy and sell them. All other fluctuations will have no consequence on your returns.
In order to know more about value investing, you can reach out to a financial advisor.