The meaning of value investing is to buy quality stocks at an undervalued price. It is an investment strategy. The term undervalued means intrinsic value below the market price. Almost all the value investors follow the following theory which states “The market does not always price the stocks fairly.” Hence there will be stocks below the intrinsic value.
In order to invest in a value investing process, it is necessary to start with screening stocks, stock history, business fundamentals, and price valuation. If the investor is an individual then he/she might invest in a successful company. These companies are making a lot of buzz in the market. The problem is that their stock prices are often overvalued. There are times when a good business under-perform. When not doing well, their stock prices also face a downturn but good companies always bounce back.
As a value investor, find companies that are strong. Then estimate its intrinsic value. In order to understand the intrinsic value, read companies’ financial reports. This helps us understand the real things happening in the market.
Circle of competence
The core business operations identified involve better stock analysis. Try to figure out basic questions about a company that helps to find the underlying business about a stock. Hence, invest in companies whose in and out businesses are known. This is investing in one’s circle of competence. How to build a circle of competence? Download and read the annual report thoroughly. Ask a few questions related to the company, product and customer, resilience and financial data.
Value estimation
The present value calculation is the intrinsic value. More accurate is future cash flow and precise will be intrinsic value calculation. Here circle of competence comes into play. Hence a value investor must analyze the company such that the future cash flows of the company are known.
Margin of safety
No one can predict the future and hence investors prefer dealing with blue-chip stocks. Because future cash flows of these companies are predictable to some extent than others. In order to adjust the inflated intrinsic value, a reason for safety must be applied. The correct amount of margin of safety that can be applied is unknown. A person who is unsure about future cash flows can even have the margin of safety as ½ which is 50%.
In the case of investing in the stock market then one must follow value investing. Investors must know the methods to value the stocks in the company. Hence the value investors know how to not to invest blindly. At MahendraProphecy.com, the Stock Investment Report guides investors to pick value stocks and multibagger stocks that helps you build a solid portfolio. Some of the Multibaggers recommended in the stock Investment Report includes TESLA, APPLE, MICROSOFT which made huge fortune for investors.
