The Pros Of Value Investing

In my honest and assured opinion, value investing is one of the best things to have happened stock investing. At least; Benjamin Graham agrees with me. Ask Warren Buffet, I know his opinion will not be any different. If your portfolio is going to stand the test if time; I must implore you to look the way of value investing. Before I dig into the pros of value investing, let me attempt a concise explanation of the meaning of the value investing.

Let me give a list of definitions, perhaps you will be able to identify with the one that most appropriately conveys the meaning to you.

• Value investing is when an investor invests in a company trading below its inherent worth.
• When an investor specializes in buying stocks that are grossly undervalued but have not lost their value.
• Value investors buy stocks whose profit potential is far higher than its present price; that way they are able to 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 selling price is low and sell when it is high.

To be able to excel in value investing; there are certain sure fire tools you must familiarize yourself with; they are tried and tested tools that great value investors have used and are still using.

Top on the list…

The price to earning ratio: The value investor uses P/E ratio to quickly determine the worth of a stock relative to how much a company is earning. The value investor believes the lower the ratio (less than 10) the better the deal.

Strong fundamentals: The value investor believes that for a company to a real bargain, the company must have fundamentals strong and healthy enough to imply that it is worth more than its selling price. The value investor views very strongly current price in comparison to intrinsic value and not to historic price.

Current assets vs. liability: The value investor weighs the size of the current assets over the liability of a company. The value investor is excited when he sees a company whose current asset is twice of current liabilities.

Earnings growth: Value investor believes earnings growth of a company should be al least from 7% - 10% per annum compounded over the last 5 – 10 years.

Earnings per share: The value investor considers EPS as a vital tool that helps estimate the value of a share in comparison ton the selling price. The higher earnings per share; the better the deal.


Why do value investors love value investing?

1. It reduces risk: risk of a share underperforming is greatly reduced because of “guarantee indexes” explained above.

2. Profit possibilities is great and guaranteed

3. The power of compound interest

4. Getting stocks at discounted price.

The Importance of Long Term Trading

Long term trading is a very effective and reliable strategy to adopt if you desire to create wealth via the capital market. Take a look at the investors that are living testimonies of the glowing legacies of the stock’s market wealth; without fear of being contradicted are long term traders. Long term trading is a pattern of trading that allows an investor to invest in shares over a long period; during this period a lot of factors combine to enlarge the size of your investment or portfolio. In the course of this article, I will discuss some of these factors. But first; let’s look at WHY long term trading is highly recommended if you want create lasting wealth from the stock market.

INFLATION: long term trading allows you to beat inflationary trends in the economy. Inflation diminishes the size of your savings in a bank over a period of time. Let’s say you banked 10,000 in a bank and the bank gives you 5% interest at the end of the year; your savings would amount to 10,500. Inflation trends dangles between 8% – 12% within the year, imagine what that range of inflation would do to your savings over a period of 5 years. But if your invest that same money in a strong stock adopting long term trading, you are guaranteed returns ranging from 50% - 100% in a year from the forces of capital appreciation, dividends and bonus scrip over the period in discussion (5 years)

COMPOUND INTEREST: Compound interest is one of the most awesome wonders of investing. It is the process where the interest your invested capital earns in turn also begins to earn interest which is added to your capital and the process continues as long as it is allowed to continue. Compound interest only functions effectively around the atmosphere of long term trading. The power of compound interest is hidden in TIME.

DIVIDENDS AND BONUS SCRIP: As the months and years roll by; every unit of share you own in your portfolio is enlarged by the combined forces of dividends and bonus shares. Each unit of shares in your portfolio over time earns interest called earnings per share from the company you invested in. If the company’s business performs well; additional free shares will be added to your portfolio. Long term trading allows you to enjoy the fruits dividends and bonus issues.

RISK REDUCTION: Long term trading reduces all risk associated with stock trading. Every seasoned stock trader knows you can’t always beat the market. There are forces every stock trader has to contend with. Forces like price fluctuations, economic instability, bad news that cause stocks or investors to sometime overreact, liquidity, and other related forces that space will not allow me to include. All of theses forces can be corrected with long term trading unlike short term trading; long term trading gives you a balance. A balance that gives you peace of mind.