There are stocks which performing exceptionally; some show moderate returns, and few of them underperform. Investors perceive these under-valued stocks as breakthroughs to generate high returns. This is nothing but "Value Investing," let's get to know more about it in this article.
Value investment strategy observes the market and focuses on stocks that look to be underappreciated by the market and the investors. Value investors keep a keen eye on stocks that the market is underestimating. They focus their strategy on stocks that appear to be traded for less than their book or intrinsic value.
The market fluctuations can cause stock prices to dip or rise. However, the sudden price shifts don't tell about a company's reputation. This is where Value investment comes into the picture. Investors use the investment strategy to focus on a company's core business plan for the future.
However, value investors emphasise on the safety of their investment as every value stock can't become successful in the future. While other investors focus on the stock price of a company to know about its profitability, value investors focus on the intrinsic value of the stocks. What value investors believe to be the real price of the stock is its intrinsic value. However, the stock price can be lower than the intrinsic value as the investors underestimate a company's profitability. Value investors purchase the stocks when their price is low. Value investment strategy becomes successful when the stock price increases and touches its intrinsic value.
While a stock's lower price contrasted to the company's profits, revenue, etc. can define the intrinsic value, there are other focus points in the minds of value investors.
Some of them are-
Value investors focus on companies with low stock price but profitable track records
The companies need to have offered profits to their investors regularly
The revenue must be reliable. Also, there must not be a huge dip or rise in the company's sales
One of the essential things that value investors look for is the margin of safety. Value investors look for stocks with low prices but want the intrinsic value to be much higher. However, it is possible that the prices of stocks never recover, which is why value investors focus on a higher margin of safety.
When the margin of safety is higher, it makes a value investor believe in the company. Value investors buy stocks at a bargained price. They buy stocks which have a much lower price. Also, the intrinsic value of the stocks needs to be higher. It helps them to make more profits by investing at a lower price.
A person buys a stock at Rs. 15. However, the intrinsic value of the stock is Rs. 40. In such a situation, the value investor will wait for the price to touch Rs. 40. If the investor sells the stocks, then there is a profit of Rs. 25 to be made. Also, the company's price might go higher than Rs. 40. The rise in price can get more profits for the investor. The margin of safety for a value investor was Rs. 25. A value investor focuses on companies that offer a higher margin of safety.
Value investment's strategy is different from typical investment plans. While the stock price of a company is the most crucial factor for many people, value investors believe in the intrinsic value of the stocks. The price of value stocks can be lower due to many factors, such as media hype that a company might have received. It can make the price dip or rise.
However, value investors don't buy into such biases and focus on the company's revenue. Value investment strategy goes by the company's intrinsic value and not the people's perceptions.
Value investors concentrate on a company's business plans and profits. They also try to fend off themselves against value traps.
A value trap is when investors buy stocks due to their low price, but they don't turn out to be inexpensive. Investors buy stocks as the company seems like making high profits, but when the market cools, the company suddenly stops making high returns. It is one such value trap. However, investors can fend off the dangers of value traps.
Value investors need to focus on a company's future and not its past profits. The person must look for the profits a company might make in the coming years.