Features of Value Investing

Value investing is a strategy employed by investors to select stocks perceived to be underestimated by the stock market, and so are being traded for less than their book value.

Value investing is a strategy employed by investors to select stocks perceived to be underestimated by the stock market, and so are being traded for less than their book value. Value investors believe that the stock market always overreacts both to good and bad news.

This results into stock price changes that do not necessarily tally with a company's long-term fundamentals. The fluctuations allow value investors get their profits by purchasing stocks at discounted prices on sale.

A company’s stock price can change, while the company’s value remains the same. Stocks go through seasons of lower and higher demands, leading to price fluctuations.

But buying a stock while the demand is low does not affect the value of what you’re getting. This is the bedrock of value investment; if you believe in the value, you won’t be affected by the fluctuations and you’ll stay with the investment for the long-term.

Savvy and perceptive value investors are of the opinion that it is always better to invest in stocks when they are on sale. This enables them purchase the stocks at cheaper prices, and when the prices go back high, they are able to make huge profits.

In order to spot the stocks on sale, value investors investigate to find them and to buy them at discount prices, compared to the normal market value. Value investors are usually rewarded handsomely for not only buying, but also holding the stocks for long-term periods.

A stock is regarded as discounted or cheap in the stock market, if its shares are undervalued, and value investors hope to gain from shares which they perceive to be greatly discounted. There are various metrics used by investors in an attempt to find the valuation or intrinsic value of a stock.

The intrinsic value refers to a combination of employing various methods of financial analysis, such as analyzing a company’s financial performance, earnings, revenue, profit, cash flow and fundamental factors. The fundamental factors employed include the company’s brand, target market, business model and competitive advantage.

Book Value

It measures the value of a company’s assets compared to the stock price. The stock is undervalued if the price is lower than the asset's value and the company does not happen to be going through a financial hardship.

Price-to-Earnings (P/E)

This shows a company’s earnings' record and uses the record to determine whether the stock price is simply not reflecting all the earnings, or if it is undervalued.

Free cash flow

After the costs of expenditures have been subtracted, the cash generated from a company's revenue is known as free cash flow. It is the remaining cash after all expenses, including capital expenditure, have been settled.

When a company generates free cash flow, it will have enough money to invest in the business's future, pay dividends, pay off debts, and more.

After all these metrics have been reviewed, the value investor then considers the investment and decides if it is worth it or not.

Successful value investors do not follow the herd. They are not swayed by the crowd, or led by emotions. If they believe an investment has impeccable value, then they stick to that investment. They also possess diligence and patience to carry them through seemingly tough seasons.