The pros of value investing

In my honest and confident opinion, value investing is one of the best things to ever happen in stock investing. At least; Benjamin Graham agrees with me. Ask Warren Buffett, I know his opinion will be no different. If his portfolio is going to stand the test of time; I must implore you to seek the path of value investing. Before I delve into the advantages of value investing, let me attempt a concise explanation of what value investing means.

Let me give you a list of definitions, perhaps you can identify with the one that most accurately conveys the meaning to you.

– Value investing is when an investor invests in a company that is trading below its inherent value.
– When an investor specializes in buying stocks that are severely undervalued but have not lost their value.
– Value investors buy stocks whose potential profit is much higher than their current price; that way, they can grow their portfolio to enviable heights over time.
– Value investing is the strategy of selecting stocks that trade for less than their intrinsic value.
– Value investors believe in buying a stock when the asking price is low and selling when it is high.

Being able to excel at value investing; there are certain safe fire tools that you should become familiar with; they are proven tools that high value investors have used and continue to use.

First on the list…

The Price-Earnings Ratio: The value investor uses the P/E ratio to quickly determine the value of a stock relative to how much a company earns. The value investor believes that the smaller the ratio (less than 10), the better the deal.

Strong Fundamentals – The value investor believes that for a company to be a true bargain, the company must have fundamentals that are strong and healthy enough to imply that it is worth more than its asking price. The value investor views the current price very strongly in comparison to the intrinsic value and not the historical price.

current assets vs. Liabilities: The value investor weights the size of current assets over a company’s liabilities. The value investor gets excited when he sees a company whose current assets are twice its current liabilities.

Earnings Growth: The value investor believes that a company’s earnings growth should be at least 7-10% per year compounded over the past 5-10 years.

Earnings Per Share – EPS is considered by the value investor to be a vital tool that helps estimate a stock’s value compared to its selling price. The highest earnings per share; the better the deal.

Why Value Investors Love Value Investing

1. Reduces Risk: The risk of a stock underperforming is greatly reduced due to the “guarantee ratios” explained above.
2. The chances of profit are great and guaranteed
3. The power of compound interest
4. Obtaining shares at a discount price.