Value-based investment (investment in value, value trading) is based on the ideas of Benjamin Graham and David Dodd, introduced in 1928. There are many interpretations of this approach, but in general, the concept is as follows.
A trader seeks to buy stocks cheaper than their actual value. It is calculated by discounting future cash flows. If the company’s share price is lower than its actual value with some margin of safety (usually around 30%), the paper is recognized as underexplored and promising for purchase. As a rule, companies that are temporarily in a difficult situation are among the undervalued assets – but the market reacts too strongly to the situation, therefore their securities are traded below the actual value.
Such traders rely on the help of financial analysts, statisticians, actuaries, macroeconomists, industry economists, market professionals, accountants, engineers, scientists, programmers, librarians, research assistants, etc.
The value-based approach is not very popular among traders since for it to work, you need to make significant efforts. The goal of traders, in this case, is to make money on cheap stocks. It is more complicated than it seems and requires a lot of patience.
Therefore, in the long run, not those who consider value investment easy win. Only traders who know that it is not easy to get high profits, but they continue to move towards the goal.
Investing in undervalued stocks, traders are more than others concerned about the essence and fundamental indicators of a business, rather than the influence of other factors on stock prices. They believe that fundamental factors, such as profit growth, dividends, cash flow, and book value, have a greater impact on the value of shares than the market. Such traders in a sense can be attributed to conservative investors because they usually buy securities of companies for a long time.
If the company’s performance is good, but stock prices are lower than their actual value, the trader understands the market valuation is wrong. He buys papers and waits for the market to correct its mistake.
Here are the indicators to look for when looking for potential investments. Of course, each trader has his approach, but he most likely includes the following factors for evaluating
Investing in undervalued stocks is working successfully, but the trader needs to be wary of companies whose business is declining. The pace of the introduction of new technologies is accelerating, the Internet is becoming an integral part of our life, the software is conquering the world. In such conditions, companies that do not want to apply new technologies and adapt to changing market conditions do not just slowly die, but break down into the abyss, dragging investors along with them.
With this approach, many traders have made huge fortunes. It is effective if you carefully approach the valuation of assets and buy paper companies for the future.