Welcome to professorsavings.com, we teach finance basics. Today we will be teaching about an introduction to value investing.
Value investing is a very powerful investing method provided you can follow the rules. They are:
One, invest in companies not stocks. Value investors see themselves as part owners of the companies they invest in.
They only buy shares in companies that have strong fundamentals and good long-term prospects to continue delivering what consumers want.
Two, invest with a margin of safety. Value investors believe that when buying shares, they should only invest when the market price is significantly below the underlying value, thus giving a margin of safety.
Building a margin of safety into every investment increases profit potential. It also limits downside risks.
Three, buy and hold. Value investing is a long-term strategy. It doesn’t attempt to profit from short term trends in the financial markets.
A value investor might purchase an undervalued stock and sit on it for years while waiting for its price to meet or exceed the underlying company’s value.
Four, ignore the crowd. Value investors believe that most investors buy and sell at the wrong times.
When share prices are rising, most investors don’t want to miss out on the action so they buy high; when share prices are dropping, most investors start to fear that they’ll lose all their money so they sell low.
Value investors completely ignore the herd mentality and base their buy and sell decisions on the relationship between share price and the company’s fundamental value.
If you can stick to these four rules, you’ll be well on your way to becoming a value investor.