We stand amid times when income for an investor is exposed to increasing risks. Any investor would want his investment to yield maximum returns in a limited time frame. The factors that govern the performance of investment are majorly uncontrollable by the investors.
With technological advancements coming thick and fast, several governing factors have taken control of the investors’ income and return on the investment in the international market in contemporary times.
However, some investing techniques and methods can guarantee better investment alternatives, along with several advantages for an investor.
Some investors invest in penny stocks, while some of them invest in growth stocks for an enhanced portfolio and increased returns through several methodologies, valuations, comparative analysis to bet on a stock. Overall, investors tend to choose the best possible alternative for capital appreciation.
Value Investing is one popular methodology often followed by the investors to gain maximum returns on their investment. When an investor makes investment through value investing, he/she is interested in making an investment in the stocks that seems to trade at a value lower than their intrinsic value.
As opposed to growth investing, value investing seeks to maximise returns by finding stocks that are undervalued by the market and assesses the intrinsic value of a stock, generally through a valuation method like discounted cash flow analysis, and compare that value with the stock price.
The value investors attempt to invest in stocks that are undervalued by investors and the market as a whole and appear to be a pocket friendly option for investment when compared in the light of the business’ underlying revenue and earnings.
Moreover, there is common anticipation among the value investors about the price of the stock where the investment has been made that the stock price shall rise as a greater number of people shall invest in an attempt to appreciate the true intrinsic value of the company's fundamental business.
The larger difference between the intrinsic value and the existing stock price indicates a greater margin of safety for the investors looking for investment opportunities; however, this does not guarantee complete security for an investor for the investment, as not every value stock turns its business around successfully.
However, to some extent, the safety of margin helps to mitigate the losses for value investors when they're wrong about a company.
Merely knowing the concept of value investing is not enough, an investor needs to take into account the following tips before going forward with value investing.
Keep Emotions Under Control and Don’t Be Driven by Other Investor’s Sentiments
As the above quote rightly reads, control over one’s emotions is one of the many things that is destined to be at the top of any investor’s list of precautions. Emotions like fear and greed are the two opposite and quite commanding emotions that can influence an investor’s decision to invest.
Out of greed and with a purpose of value investing, an investor would want to invest in a business with a low stock price, which may plunge further with loose business fundamentals and an inability to make a rebound even in opportunistic times.
Also, investors need to be confident about their knowledge upon which an investment option is chosen and have faith in the same. At times, it may happen that an investment might appear boring or less lucrative at that point of time. In this scenario, investors are highly likely to be driven by each other’s investment patterns of either increasing the investment or retrieving the same.
As investors tend to go with the flow of the market, many of them end up making foolish investments. As a value investor, one needs to bestow a lot of patience in his/her investment and avoid emotional override over the technical knowhow of the investment.
Boost of Research Quotient
As patience forms the ingredient to the secret sauce for value investing, it is equally important for an investor to develop and accept the reality of considering research-oriented choices while investing. This might look boring and time-consuming as it requires studying several aspects of the business and reading the same aspect from different researchers’ view might confuse an investor before forming an opinion.
Notwithstanding these, an investor’s knowledge obtained thorough research helps to provide weightage to his decision of investing in a stock. Good research can help to leverage your investment earnings. An investor should not be afraid, bored, confused or demonstrate any such characteristic, but only be interested in doing research regarding their investment because after all, it is their money, and no one can better take responsibility for the money but them.
Ample Technical Knowledge
As value investing involves valuing a stock and its performance, an investor needs to have a good hand over several technical aspects of the business like the P/E ratio, cash flow-based valuations etc. as these are commonly used metric to determine a stock's valuation.
P/E ratio and cash flow-based valuations highlight the actual performance of the business and facilitate comparison among businesses.
P/E ratio can be obtained by dividing an entity's existing stock price by its EPS or earnings per share and is subject to heavy dependence upon the EPS.
The EPS cannot always represent a true figure and can be manipulated by the Company. Therefore, an investor should not completely or even highly rely on these valuation methods. In the game of investing, you cannot guarantee the success of the investment by only relying upon one thing. Moreover, there are instances when the investors are lucky enough to bag unpredicted appreciations even in the poorest of the investment decisions.
Since luck is not everything that an investor can rely upon completely, value investing demands an investor to develop thorough technical knowledge and professional guidance if required (in case of amateur investors).
Based on the above point, we can conclude that an investor does not simply invest in the stocks while value investing, he/she rather invest in the business itself. It is not the stock price alone that matters before choosing to invest in a certain stock. Strong fundamentals of a business drive investment in value investing irrespective of the stock price.
The fundamental analysis encompasses the revenue model of the business, its liquidity ratios, with competition faced, and the possibility for profitability if not profitable in the existing scenario. Value investing is one way where an investor need not compulsorily track the market trends and stock price movement and make a quick response to the same.