When you invest, do you select stocks that seem inexpensive based on the value of the company’s net assets today? That may mean you tend to be a value investor. Value investing is just one of the many investing styles used by individual investors. Generally, value investors look for market opportunities others may have missed-overlooked stocks that have the potential to become attractive long-term investments.
Watching for Bargains
In the simplest terms, value investing is bargain hunting because value investors search for stocks that may be worth more intrinsically than their current market prices show. But value-oriented investors don’t buy just because the price is low. Their theory is that, if a company can earn even "just average" profits on its net assets, its share price should rise. These investors also take into account other factors that may contribute to a low stock price, such as the underlying company’s decline in popularity with investors or investors’ ignorance of the stock’s true value because the company isn’t followed closely by analysts or publicized in the news media.
Value investors also tend to focus on current conditions and measurable factors, such as a stock’s price-to-earnings ratio or its price-to-book ratio, rather than speculate about future earnings growth.
These bargain hunters don’t like to pay a premium for growth potential. Instead, "early bird" value investors prefer to buy a stock before it moves up and then wait for it to appreciate after other investors realize its potential. Of course, there’s no guarantee this will happen. Value stocks do tend to be less volatile than other stocks because value investors, with their long-term expectations, may be less likely to sell on impulse in the event of a disappointing quarter or two.
Combinations Work Best
Your own investment choices probably reflect a mix of philosophies. Most savvy investors combine several styles to create a diversified portfolio. Diversification helps increase a portfolio’s potential for appreciation and reduces overall risk in changing marketing conditions. IBI