Investing can often seem overwhelming to many people who would like to start putting their money to work for them. This is largely due to the perception that investment opportunities require a vast knowledge of financial markets accumulated over many years. If this sounds remotely to you, terms like the stock market, stocks, and shares are likely to make you feel a bit anxious and doubtful. Fortunately, however, this does not have to be the case. The truth is, there are several lucrative investment options and strategies that even the novice can benefit from.
About Value Investing
Investing in value is an investment strategy that does not require universities to know the financial markets to benefit. Instead, by employing the very workable fundamentals of this strategy, you’ll also be using the tips and tricks used by the likes of Warren Buffet and Benjamin Graham to invest based on intrinsic value and increase your wealth. These principles include the following:
– Understand that companies have intrinsic value that can be bought and sold.
– Define your margin of safety
– Rethink the efficient market hypothesis
– Lead from the front
– Be diligent and patient,
Here’s how each of these value investing principles will work for you.
1. Understanding the intrinsic value of companies
When it comes to investments, every business has intrinsic value that is often reflected in its finances. Shares and stocks are the avenues through which the average person can buy the value of these companies. It is important to note that the prices of stocks and shares can fluctuate even if the intrinsic value of the company remains stable. Also, the prices and sales of these stocks and shares are not advertised per se. As such, you’ll need to do a bit of detective work to find stocks and shares in stable companies that sell for low prices, ensuring you earn more in the long run.
2. Define your margin of safety
The gains and losses when investing depend mainly on your ‘margin of safety’. You are likely to make more profit with a healthier margin, as your margin of safety lies in the difference between the value of the shares and how much you pay for them. So a share may be worth $ 50.00, but you bought it for $ 10.00. In this case, your margin is $ 40.00 ($ 50.00 minus $ 10.00).
Essentially, you maximize your margin of safety by buying your stocks or shares at lower prices (as low as possible) so that even if the level of growth is lower than expected, you can still minimize losses and gain from your investment when the time comes. time to sell. Once you buy your stock, simply wait until it reaches or approaches true (intrinsic) value.
3. Rethinking the efficient market hypothesis
Unlike value investors, investors who hold the efficient market hypothesis believe that stock prices reflect the true value of a company. However, value investors do not adhere to this hypothesis. Instead, they believe that stock prices may be priced below or above their true value. It is this true (or intrinsic) value that becomes the focus of value investing.
4. Lead from the front
Due in large part to the fact that value investors do not subscribe to the efficient market hypothesis, they are less likely to follow the investment patterns or habits of the general business population. That is, they are less likely to buy when everyone else is buying or selling when they are selling. Instead, they can stand their ground or sell when others buy, for example.
5. Be diligent and patient
Finally, once you have started the process of investing in value (that is, you have bought stocks or shares in a particular company and are now active in the stock market, you need to be patient to reap your payoff. You have likely bought your shares for prices below the true value of the company. Therefore, you will have to wait a bit to see the dividends of this investment. Also, you must be diligent in observing the market and evaluating the value of your investments.