Value Investing: how it works
Published: 18 November 2020 by Andrew
One of the techniques to invest in the most profitable stocks in history is Value Investing. This technique was developed by Benjamin Graham and David Dodd in 1928 and has generated truly extraordinary results.
An example? The famous Warren Buffett, one of the richest men in the world, managed to accumulate his immense fortune starting from scratch by applying the principles of Value Investing to the letter.
In this article we explain in detail what Value Investing is, how it can be applied today and what are the limits of this technique.
Our goal is to concretely help those who want to start investing: for this reason we immediately highlight some indispensable tools.
An example? The eToro platform that allows you to invest in the markets but is also the largest social network of investors in the world and, above all, allows you to automatically copy what the best professionals do.
In practice, with eToro a beginner can immediately get the same results as a professional and can also learn to invest, if he wants, by observing in real time what the best are doing.You can sign up for free on eToro by clicking here
What is Value Investing, in simple words
Investing in Stocks is not complicated: unfortunately, however, there are many false gurus interested in selling low value courses that confuse beginners, presenting the stock market as a difficult market, to be dominated with arcane techniques. Obviously, these techniques are known only to them and for this reason they sell them at a high price.
In fact, we can say that there are two types of techniques for investing in the stock market:
- Value Investing
- Growth Investing
Value Investing is based on the principle that companies must be evaluated based on their tangible value and current earnings. In this case much less importance is attached to the market trend and future forecasts. These elements, on the other hand, are the basis of Growth Investing.
The basis of Value Investing is the idea that investing in shares is a real business: shares must be carefully evaluated, bought at a low price and then resold at a higher price.
In practice, doing Value Investing means trying to be immune from the irrationality of the market: you have to buy (with care and attention) when the market goes down and sell (always with care and attention) when the market goes up.
How to evaluate Stocks
Put like that, it seems to be simple and indeed it is. How do you decide if a stock has a low enough price? The inventor of Value Investing, Benjamin Graham, has developed a mathematical formula to calculate the value of a share:
√ (22,5 * Profit * Book Value)
If the price of a stock is lower than Graham’s number, then the stock is undervalued and worth buying.
These are easy calculations to do, since the data of listed companies is public. In any case, we must add that Warren Buffett, apostle of Value Investing, uses an even easier approach, of a qualitative rather than a quantitative type (we will see this later).
What do you need to do Value Investing
The principle behind Value Investing is all in all very simple: buy shares when prices are low and resell them when prices are high, making a good profit.
The value of the shares, this is an important point, must be calculated objectively, not with subjective illusions such as the market trend or the expectation of future profits. Among other things, expectations of future profits are always inflated to excess. Only current earnings are objective.
If the concepts behind Value Investing are so simple, why do so many investors fail when they try to apply the technique?
Failure is usually not technical but psychological: following the principles of Value Investing means buying when the price of a share falls and keeping it even if the price continues to plummet (always if the assumptions that pushed us to purchase are still true).
In short, if I bought a stock because it is convenient according to Graham’s number, I must not be frightened by a market crash. Unfortunately, many investors have an unlimited fear of losing money and therefore sell if a crash occurs.
The smart investor (according to Benjamin Graham’s definition), as we have said, buys during the collapses.
Here, what many lack to be smart investors and be successful with Value Investing is control of emotions.
Book to learn Value Investing
What is the best book for learning Value Investing? Many would rightly answer this question by Benjamin Graham’s The Intelligent Investor. In this book (from 1949) Graham exposes his theories to the general public.
Obviously, this is an outdated book (although periodically updated editions are published, the latest in July 2020) and with a rather substantial theoretical framework that could discourage novice investors who want to start investing without errors.
ForexTB free Course
If you fall into this category, you probably better download the free course offered by the ForexTB broker.
This is a complete course, which truly explains how to set up and manage investments without errors and with great potential for returns.
This course has become famous because it is completely practice-oriented and written in a very simple language, therefore suitable even for those who are really starting out. The success is such that it already has hundreds of thousands of downloads.You can download the ForexTB course for free by clicking here
ForexTB is a very famous online investment platform, one of the most used in Europe, which has created the course precisely to further help its clients.
Anyone who signs up for ForexTB, in addition to being able to download the excellent course we have talked about for free, is followed step by step by a true investment expert who provides precise advice and guidance.
This is the best way to start investing, also because a demo platform is available for free that allows you to invest virtual money: in this way you can do experiments without risking anything.
Finally, it is important to remember that with ForexTB there are no fixed costs or commissions and therefore represents the most valid alternative to buy shares in a convenient way.You can sign up for free on ForexTB by clicking here
Value Investing represents one of the smartest and most profitable approaches to the market. Long-term studies have shown that the returns that can be obtained are higher than those generated with other approaches (for example Growth Investing).
Those who follow Value Investing techniques decide whether to buy (or sell) not on the basis of market trends or forecasts of future profits but on the basis of concrete and measurable values such as net profit and book value.
An investment technique based on the evaluation of the effective value of the shares.
Yes, it is demonstrated by the fact that one of the most famous investors in the world, Warren Buffett, uses this technique.
The basic text is “The Intelligent Investor” by Benjamin Graham. Those interested only in the practical part can download the free ForexTB course.
Basically yes, even if we must take into account that the markets have changed in recent years.