As mentioned in previous articles, financial literacy and understanding the value of the stocks are important factors in choosing what stocks to buy – now, to know when to invest, the value investor needs to take an intelligent approach or sound reasoning before buying a particular stock.
For example, a company may be about to secure a new project or may soon benefit from new legislation. A value investor would not simply look for an opportunity to buy; rather, he/she would ask the following questions before acting:-
- Is the company dominant in its industry?
- Excellent reputations for quality of management, products and competition are key ingredients for a value investment. As such, a value company is most likely to have a strong domination in the industry.
- In addition, it’s useful to remember bargains show up in the market all the time because of the short-term irrationality of buyers and sellers.
- Is the stock currently traded under its fair value?
- Even during the market downturns, value stocks tend to perform better than average, either declining less than average or even rising. In 2008, one of the worst years on US record, McDonalds rose in value while nearly other stocks prices declined.
- This does not mean that value stocks are exempt from price declines. However, well selected value stocks do tend to outperform the market as a whole over the long term.
- A second source of returns on a portfolio, apart from price appreciation, is dividend income. This may not be for those who desire fast growing stocks. Value investors can make the most of dividend yield by reinvesting dividends in purchase of additional shares rather than taking payments in cash. The value investor is most probably more conservative and concerned with volatility than the growth investors.
- What is its recent price history?
- In the long term, stock prices tend to move in line with the company earnings. As such, it would be wise to look to a company’s past earnings trends and determine whether those trends will likely continue into the future.
- Value investors track earnings and not necessarily look at lists of “stock to buy” for buying decisions. As far as they are concerned, the rationale of doing so is probably undervalued and the cyclical nature of this sector will come around again.
- What criteria determines this conclusion about valuation?
- A good way to look at this question is to view the value of the stock in comparison to putting it away in a more ‘secure’ investment. For example, if to save in the bank and earning its fixed deposit’s rate is a losing proposition by comparison, then investing would be wiser. This is because the interest rate of a bank is always much lower than the real inflation’s rate.
In essence, it is safe to conclude that to invest intelligently and wisely, one needs to look beyond the financial statements to make better informed investment decisions. With financial mastery coupled with insight knowledge and appropriate mindset, the chance of succeeding in investment is definitely relatively much higher.
FORMULATING AN INVESTMENT STRATEGY
As such, every investor needs to develop a series of strategies for investing. (For those not in the know, an investment strategy is a set of rules, behaviors or procedures, designed to guide an investor’s selection of an investment portfolio. Usually the strategy will be designed around the investor’s risk-return tradeoff. Some investors will prefer to maximize expected returns by investing in risky assets, others will prefer to minimize risk, but most will select a strategy somewhere in between.)
This is because at the end of day, every investor wants to make a profit. Without an investment strategy, how would an investor know which stocks to buy and which are too risky? How long will one hold stocks?
As such, to ensure that you as an investor achieve your goals with much certainty and consistency, you need to begin with a strategy and vision, and end with a workable model and analytical insights. Stay focused on the big picture without losing the details by measuring, monitoring, and managing them effectively as well as closely in line with the saying, “you can’t manage what you don’t measure.”
Uncovering the realities that lie behind the data is what business analytics is all about. You would need to recognize those competitive edges, usually hidden to the casual observer, in the companies you invest in.
All the best in your investment journey!