Value investing is a simple strategy at its core. Value investors select stocks that the market is underestimating for their intrinsic value. Have you ever wanted to buy a new product, but waited for a promotional sale to get it at a discount? That’s all value investing is; buying good stocks at bargain prices!
The art of value investing believes that the market sometimes overreacts to bad and good news, resulting in price movements that don’t correspond to the long-term fundamentals of a company. Such overreaction from the market opens up opportunities for investors to buy discounted stocks and profit from them in the long run.
To find the book valuation of stocks, investors use various metrics such as financial performance, earnings, revenue, cash flow, and company profit. They also consider some fundamental factors like the company’s business model, competitiveness, target market, and brand awareness.
Whether it’s your first time to get your feet wet in the stock market or you’ve been investing for some time, it pays to learn value investing and enjoy solid returns that this strategy brings.
You need to become familiar with the benefits of value investing to make the most out of it. Below are some practical reasons why you should try this approach.
Anyone Can Be Successful In Value Investing
You can be successful in value investing regardless of your financial income and educational background. Since you’re buying discounted stocks, you don’t need a significant amount of capital to start using this strategy. All you need is hard work, time, and a lot of patience.
Yes, you heard it right – patience is the most vital factor for your success in value investing. It’s an approach wherein you are waiting out short-term fluctuations in the market to enjoy long-term returns.
Value investing doesn’t require you to be an “active trader”, so being an expert in various trading platforms and styles is not a requirement. You don’t need the genius of Warren Buffet in order to succeed in this strategy. Sure, you’re going to make mistakes along the way, but since you’ve already set your own “margin of safety”, losing money is less likely even if stocks underperform.
Removes The Investor’s Emotions From The Equation
One of the common weaknesses of investors is getting emotional when the market fluctuates. The fear of experiencing losses forces them to withdraw money without taking advantage of stocks that rebound and outperform the market over time.
With value investing, you can make smarter decisions. A 10% jump in the market will not get you too excited to sell. Stocks going down 3% from its previous value will not make you run for the hills either. Value investing lets you focus more on the long-term growth of your investment.
Lets You Take Advantage of Compounding
Value investing allows you to reinvest a dividend for a higher profit potential over time. Compounding at, say 3%, can significantly impact your wealth as you retire. Compounding will result in more earnings in a shorter period without the need for extra work on your part.
If you do the math, your money will double in about 33 years, even if you’re pocketing a 3% dividend from your investment. What happens if you invest it back to buy more shares? Your investment would double 10 years earlier. Remember that even the smallest amount of money can significantly increase over the long term.
Lesser Risk And Volatility
Unlike short-term investment strategies, value investing is subject to far lesser risk and volatility. Price fluctuations in the market are less likely to affect you since you’re not buying and selling stocks within short intervals.
As already mentioned, investors tend to get emotional and can be poor market timers, which result in investor loss. With value investing, you don’t have to frequently time profitable buying and selling of stocks, thus avoiding losses due to timing mistakes.
Enjoy Lower Tax Rates
Value investing requires you to pay far less taxes when compared to short-term investments. If you’re an active trader and own stocks in a year or less only before selling them again, you’ll pay tax at the top of your marginal tax rate. The charge for short-term investments can reach up to 39%. In value investing, on the other hand, fees are only 20% at the highest. Some value investors even experience 0% tax for their long-term gains.
Value investing is all about finding secret sales on stocks and buying them at lower prices. You’re investing in these stocks because you know their real value even if the market underestimates them. You believe that these stocks have the potential to bounce back, so you hold them for the long term. In the end, you get handsome rewards that contribute to your long term success.