Value Investing is a famous investment strategy which helps to identify quality shares (by using an approximation of the stocks’ value) that are currently undervalued in the market. The worth/value of every stock is based on the performance of the company as well as a view of its future sustainable profitability (known as normalized return on equity).
Since the beginning of 2009, the global markets have faced a financial repression era. It was a period of low-interest rates as well as risk-encouragement that has led to a perfect time for growth investing. Furthermore, the market has awarded a scarcity premium to almost all those companies that can grow in such an environment of limited economic expansion prospects. Meanwhile, the market has paid less attention to the traditional value factors, such as P/E (price-to-earnings) ratios and dividend yields. However, these factors have provided substantial return premiums over the long-term.
Everything has its season and it is totally fair to say, this has been a long and cold winter for value investors that are committed to the style. Certainly after the high-flying days of the tech bubble in the late 1990s, value has not been this out of favor.
It is extremely important to remember that the value/growth cycles tend to be mean-reverting. Moreover, they have lasted between 7 and 10 years from trough to peak on average. With the growth style now in its ninth year of relative out-performance, the current phase of this cycle may be drawing to a close. We may soon enter into an environment which once again favors value investing.
After the occurrence of this shift in the market, yesterday’s laggards could become tomorrow’s leaders. In addition, investors may want to be positioned accordingly. Although nobody has any crystal ball that can tell exactly when the cycle will flip. However, there are still some signs that a shift may already be occurring.
The followings are some of these indications:
1. A weakening U.S. dollar
It is important to note that the value indexes are skewed toward different market segments, like old tech, energy, and industrials that derive significant revenue abroad. The U.S. dollar has been losing value, which may provide such companies with an earnings tailwind.
2. Higher U.S. interest rates:
History shows that value stocks have outperformed in a pervasive as well as persistent manner shortly after the initial rate hike. Remember one thing, it worth noting that the lift-off for the current rate hike cycle happened in December 2015.
3. Strengthening commodity markets:
The value out-performance is positively correlated with rising commodity prices.
4. A recovery in the high-yield bond markets:
The value and U.S. high-yield spreads are inversely correlated. The spreads are currently falling, which is a signal that the worst may be behind us.
It is possible to learn a lot about value investing strategies with the help of investment courses. Given today’s market conditions, it seems prudent to keep exposure to the value-oriented investments focused on income from low-valuation P/E multiples and dividends.
The 5 Major Stock Investing Strategies for the Value Investors
The consistent dollar cost averaging program setup is one of the best approaches to equity ownership for numerous investors, with dividends reinvested into a low-cost as well as a broadly diversified index. Some investors prefer to select individual securities and then build a portfolio based upon the analysis of each selected firm.
Mr. Benjamin Graham (the father of value investing) identified five different categories of common stock investing for do-it-yourself investors. These all 5 categories could conceivably result in satisfactory or even more than satisfactory returns. Mr. Benjamin Graham elaborated these five strategies in his book “The Intelligent Investor” for engaging portfolio managers who wanted to compound the capital.
1. The General Trading
This strategy refers to participating or anticipating in the moves of the stock market as a whole, as reflected in the familiar “averages”.
2. The Selective Trading
This strategy refers to picking out the issues which, less than 1 year or over a period of 1 year, will do better in the market as compared to the average stocks.
3. Buying Cheap and Selling Dear
This strategy states that come into the stock market when the prices as well as sentiments are depressed and selling out when prices and sentiments are exalted.
4. The Long-Pull Selection
This strategy refers to picking out companies that will prosper over the year, far more than an average enterprise. These are also known as the “growth stocks.
5. The Bargain Purchases
This strategy suggests to select the securities that are currently selling considerably below their real/true value, as measured by some reasonably dependable techniques.
Value investing is one of the famous and easy to use investment strategies. Mr. Benjamin Graham goes on to address some specific quandary that every active investor will face in determining how to manage his/her portfolio. He said, “Whether an investor should buy at lower price and then sell at a higher price, or he/she should be content to hold some sound securities through thick and thin (subject only to periodic examination of their intrinsic merits) is one of the many choices of policy which an investor must make for herself/himself.
The personal situation and temperament here may well be the determining factors. An individual close to business affairs, who is used to forming judgments as to the economic outlook and of acting on them, will be motivated naturally to make similar judgments about the general level of stock prices.
You can learn a lot more about different investment strategies and techniques through investment courses.
It would be logical to use the technique of buy-low and sell-high for such investors. However, professionals and wealthy people who are not active in business can easily immunize their thinking from the influence of year-to-year fluctuations. The more attractive choice for this group may be the simpler one of buying carefully when the funds are available and laying chief stress on the income return over the years.