Value investing is a strategy with a long history, and many high-profile financial masterminds like Warren Buffett swear by it. You might have heard of “the margin of safety”, or noticed that some stocks are talked about as “growth stocks” while others are “value stocks”. If you’re curious and want to know more, here at Nemo, we’re going to break down value-based investing in a way that’s easy to understand, as well as actionable for your investment journey.
1. What Is Value-Based Investing? 🤔
Let’s start with the basics. Value-based investing is like being the savvy shopper who knows when something’s worth more than its price tag. Instead of chasing the latest trends or betting on the next big thing, value investors look for companies that are fundamentally strong but are currently undervalued by the market.
Imagine walking into a store and finding a designer jacket on sale for 50% off. It’s high-quality, it’s timeless, and you know it’s worth every penny - plus, you’re getting it at a steal. That’s essentially what value investing is. You’re hunting for bargains in the stock market.
Value investors believe that over time, the market will recognize the true worth of these undervalued companies, and their stock prices will rise accordingly. It’s all about buying low, holding on, and then, potentially, selling high.
2. Meet Benjamin Graham: The Father of Value Investing 📕
You can’t talk about value investing without giving a nod to Benjamin Graham, often referred to as the father of value investing. He literally wrote the book on it—well, two books, actually: Security Analysis (with David Dodd) and The Intelligent Investor.
Graham’s approach was all about being disciplined, patient, and not getting swept away by market trends. His philosophy? Focus on the intrinsic value of a company - the real, underlying worth of its assets, earnings, and potential - rather than what the market says it’s worth right now.
The Margin of Safety
One of Graham’s most famous concepts is the “margin of safety.” Think of it as a built-in cushion that protects you from errors in judgment or unexpected market swings. When you buy a stock at a price significantly lower than its intrinsic value, you’ve got a margin of safety. It’s like buying that designer jacket with a discount so deep that even if the style goes out of fashion next season, you still got a great deal.
For Graham, and for value investors, this margin of safety is essential. It’s what allows you to invest with confidence, knowing that you’ve got some room for error.
3. Value Investing vs. Growth Investing: What’s the Difference? ⚖️
Okay, so how does value investing stack up against other popular strategies like growth investing?
- Growth Investing: Growth investors are like trendsetters. They’re all about finding companies that are expected to grow at an above-average rate compared to others in the market. These companies might be innovators in tech, biotech, or renewable energy, for example. Growth stocks tend to be more expensive because you’re paying a premium for that expected growth.
Here’s the catch: Growth investing is about potential, not current value. You’re betting on what a company might become, which can be exciting but also risky. If that growth doesn’t materialize, you could be left holding an overpriced stock. - Value Investing: Value investors, on the other hand, are like treasure hunters. They’re not swayed by the latest trends or the hottest sectors. Instead, they dig deep into a company’s fundamentals - earnings, dividends, cash flow, and more - to find stocks that are undervalued by the market.
The idea here is that you’re buying something solid at a discount, with the expectation that its true value will eventually be recognized. It’s a strategy that requires patience, research, and a steady hand.
4. Value Investing vs. Aggressive Investing: Playing It Safe vs. Taking Big Risks 🎢
Now, let’s throw another strategy into the mix: aggressive investing. This approach is the wild child of the investing world.
- Aggressive Investing: If you’re an aggressive investor, you’re probably chasing high-risk, high-reward opportunities. You might be into speculative stocks, penny stocks, or cryptocurrencies. The idea is to take big risks in hopes of landing big rewards. But here’s the thing: High risks can lead to high rewards, but they can also lead to big losses. It’s a rollercoaster ride, and it’s not for the faint-hearted.
- Value Investing: By contrast, value investing is more like a steady, scenic drive. You’re not in it for the thrill - you’re in it for the long-term payoff. You’re buying solid companies at a discount and holding on until the market realizes their true value.
It’s not about chasing the next big thing; it’s about finding undervalued gems and giving them time to shine.
5. How to Spot a Value Stock: What to Look For 👀
So, how do you find these undervalued gems? Here are some key indicators value investors typically look for:
- Low Price-to-Earnings (P/E) Ratio: The P/E ratio compares a company’s current share price to its earnings per share. A low P/E ratio could indicate that a stock is undervalued compared to its earnings.
- Strong Balance Sheet: Look for companies with a strong balance sheet, meaning they have more assets than liabilities. A healthy balance sheet suggests financial stability.
- Consistent Dividend Payouts: Companies that consistently pay dividends are often financially healthy and have a stable cash flow. Plus, dividends provide income even if the stock price isn’t moving much.
- Low Price-to-Book (P/B) Ratio: The P/B ratio compares a stock’s market value to its book value (what the company’s assets are worth on paper). A low P/B ratio might indicate that a stock is undervalued.
You can find a number of examples of value stocks in our ‘Copy Warren Buffett’ neme on our investment app, where we have collected together some of the companies this iconic investor has bought shares in. What they all have in common is that strong balance sheet - value investors always look for a company that’s in great shape, and which looks like it will keep bringing in profits year after year.
Remember, value investing is about doing your homework. It’s not about chasing quick wins; it’s about making informed decisions based on solid research.
6. The Patience Game: Why Value Investing Takes Time ⌛
If there’s one thing you need to succeed in value investing, it’s patience. Unlike growth or aggressive investing, where you might see big changes to the stock price in short periods, value investing is a long-term game.
Here’s why:
- Market Recognition Takes Time: It can take months or even years for the market to recognize the true value of a company. Value investors need to be willing to wait it out.
- Steady Returns vs. Quick Gains: Value investing is less about quick gains and more about steady, reliable returns over time. It’s not flashy, but it can be very rewarding if you’re in it for the long haul.
- The Power of Compounding: Over time, those steady returns can add up, especially when you reinvest dividends. It’s the magic of compounding—your money makes money, and then that money makes more money.
7. Is Value Investing Right for You? 💵
So, after all this, you might be wondering if value investing is the right approach for you. It really comes down to your personality, your financial goals, and your willingness to play the long game. Whether this is your style or whether you’re looking for faster-moving growth opportunities, Nemo has plenty of stocks to choose from.
We also currently have a registration bonus offer - all new users who top up their account with an amount up to $50 will get an additional 50% of that to invest, as a welcome gift from us.
