What Is Value Investing?

Value investing is an approach to increasing wealth where investors actively search for stocks that are undervalued. After the initial investment, value investors usually hold on to these stocks for however long it takes for their share prices to increase. If these stocks appreciate and approach their underlying values, they need to be reevaluated and if they are sold, they would generate a profit. In this blog, we’ll take a closer look at the concept of value investing and tips on investing for beginners.

Learning Value Investing

A company’s underlying value can be found by determining certain facts in a company’s financial statements. If you would like an example of what value investing is, a famous case in point is Warren Buffet’s investment in Coca-Cola. Warren Buffet and his company Berkshire Hathaway identified Coca-Cola as an undervalued stock in the late 1980s. 

Warren Buffet analyzed the financial statements of Coca-Cola and realized the company had a formidable brand name, strong earnings power, and a substantial potential to expand global reach. Seeing the difference between the actual market price of Coca-Cola shares and his estimate of the company’s intrinsic value, he decided to buy a significant amount of shares. 

Holding on to long-term compounders is also an important aspect when it comes to understanding what value investing is and how it’s best implemented. Warren Buffet believed in Coca-Cola’s potential ability to increase its intrinsic value over the long-term. This conviction influenced him to hold his investment for decades and it has grown remarkably over the years. This example illustrates the main factors of value investing which include:

• Recognize stocks that are undervalued through careful analysis of the company and its future prospects.
• Purchase stocks that are lower than your estimates of its intrinsic value.
• Hold on for a long time until the market corrects itself and the value of your shares increases.

Six Tips on Investing for Beginners

Value investing involves choosing stocks that are trading at a lower price than their intrinsic value. If you’re interested in implementing this strategy and finding out what value investing is, here are some tips:

• Learn how to estimate the intrinsic value: Intrinsic value is your estimated worth of a company based on its future prospects. This includes the present value of cash flows, assets, and growth potential which you can compare to its current market price. When starting your value investing journey, it may seem overwhelming to come up with an estimate, but consider reading the materials for the CFA (Chartered Financial Analyst) curriculum, because it will help provide the foundational concepts to help you come up with your first valuation estimate. If you prefer reading investment books instead, I recommend The Warren Buffett Way by Robert Hagstrom to get you started and have listed my other recommendations on this blog post.

• Ensure there is a margin of safety: An important part of learning and implementing value investing is to ensure you have a margin of safety. The way to do this is to purchase stocks that are priced well below their intrinsic value so you have a cushion that can compensate for volatility in the market and any errors in analysis. When there is a big downturn, you don’t need a CFA designation to know a stock is cheap and undervalued.

• Conduct research: Understanding what research is involved in value investing is important. Learn how to read and analyze financial statements, including the balance sheet, income statement, and cash flow statement. Also, knowledge of the company’s industry position, management, and evidence of any competitive advantages will help you make the right decisions. Being a good value investor is like being a detective or investigative journalist.

• Maintain a long-term perspective: One of the most important tips on investing for beginners is to understand value investing is a long-term process. It can take years for the market to identify the intrinsic value of a certain stock so be prepared to be patient and hold on to your investment. Keep in mind that a company’s value can change over time, so be sure to regularly reevaluate your intrinsic value estimates. Additionally, your ability to estimate a company’s intrinsic value will improve with a lot of practice.

• Utilize a contrarian approach: Value investing often involves taking a nonconformist approach and going against the mainstream. Investors who understand what value investing is often find excellent opportunities when they invest in stocks that are overlooked by other investors or are generally out of favor.

• Consult professional investors: If you’re not sure how to analyze financial statements and make the best decisions, consult professional investors who are experienced in value investing. Professional investors have in-depth knowledge of financial markets and they can minimize risks so your investment is safeguarde during times of economic uncertainty. Having a coach or mentor will help you on your journey.

Professional Value Investing 

Although the idea is relatively simple, determining the underlying value of a stock can present some challenges. Knowing what value investing is and how to successfully find opportunities does require thorough analysis and investment expertise. That’s why we’re here to help. 

At WealthArch Investment Services, we focus on strategies designed to generate growth in your portfolio while providing secure downside protection. Schedule a free consultation today and start advancing towards your life goals with confidence.