The dictionary defines VALUE as “something regarded as desirable”, and the “rate at which a commodity is potentially exchangeable.” This definition is a pretty good analogy of what is Value Investing. In other terms, it is described as getting the most profit by spending the least amount of money. Anyone who knows anything at all about the stock market has heard of Warren Buffett. Mr. Buffett is the largest stockholder and Chairman of Berkshire-Hathaway Corporation, and has been the most successful value investor in over 50 years. Mr. Buffett is the second richest man in the world. He still resides in the same $31,500 house that he bought in 1957. He has no flamboyant ideology about owning big new cars. Mr. Buffett drives an old model Lincoln Town car.
Buffett began to show his inclination and talent toward business dealings in 1941, when he was eleven years old, he made his first stock purchase, 6 shares of Cities Services preferred stock. His success has snowballed over that 68 years, with the purchase of more stock, more companies, (he owns Geico Insurance Co outright today).
HOW CAN I DETERMINE A VALUE INVESTMENT?
Buying stocks at a fraction of their intrinsic value has been the underlying source of amassing a fortune by individuals such as Warren Buffett and some others. It takes talent to look at stocks in a rocky market and pick the ones that have fallen far below their actual worth as stocks to invest in. That is not to say that one should just arbitrarily choose a stock just because it has just tanked, hoping for a huge rebound. Some stocks really aren’t worth anymore than their lowest price. Learning to use analytical judgment to pick the stocks that have fallen in value because of a management mistake or some other unfortunate crisis is a learning process.
The ones to choose are the businesses with large returns on equity, having little, if any debt. Under valuation is usually found in larger rather than smaller companies. Has the company managed to have a good overall record; is their management efficient? Good management is one of the most important factors in the success of a company. Once you have determined that the setback of the business is temporary and their management performance has been stellar in recent years, you may be ready to pen a check to purchase the company’s stock. But wait, before doing so, be sure that you have the capital to wait for the company to rebound from its problems. If you believe there is the slightest possibility that you will need the cash before the company’s intrinsic value has gone back up, don’t buy the stock. It is even possible that the company’s stock may fall once again, before it turns around. Be wise in the selection of your value stocks. They are a wise investment, when chosen for the right reasons.
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