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Rake in Returns with Stock Market Value Investing

Stock Market Value Investing

Stock market value investing is when investors look at the money a stock or bond is making or losing right now rather than anything it might do in the future.Value investing teaches that equities should be evaluated for their actual or intrinsic value rather than any potential gains.

Its modern reputation rests on the success of Warren Buffett and hedge-fund rock stars such as Seth Klarman. If you type their names into a search engine, you’ll get hundreds of websites purporting to reveal the secrets of these gurus.

The Principles of Stock Market Value Investing

But before you start listening to the gurus, you need to learn the basics.

  • Don’t lose money. Benjamin Graham said the first rule of value investing is “don’t lose money.” Value investors are unwilling to lose money. They sell anything that loses money and refuse to invest in anything that might generate a loss. Value investors follow this rule because they value cash.
  • Cash is king. The investment must be generating actual cash flow right now. When value investors read a financial statement, they look at the cash flow rather than estimates such as the Price Earnings (PE) ratio.
  • The investment must be undervalued. Value investors look for companies with a large cash flow but a high share value. Some value investors, such as Benjamin Graham and Seth Klarman, only buy undervalued assets.
  • Read the financials. Stock market value investing is when one pays more attention to the numbers in a company’s financial statements than to a chart. Warren Buffett famously reads the SEC paperwork on thousands of companies in his search for value.
  • Ignore the market as a whole. Classic value investors generally ignore the financial media and the markets. They only pay attention to those shares that they actually own or are interested in buying rather than the market as a whole.
  • Ignore the fads. Warren Buffett built his vast fortune by ignoring fads, including the Internet bubble and tech stocks. Instead, he often bought stocks that were boring and old-fashioned

  • Trust your instincts and judgment. Famous value investors often make buys based on their own judgment or opinion rather than market analysis. A classic example of this is Seth Klarman’s recent decision to buy mortgage-related stocks, such as Genworth Financial and Central Pacific Financial Corp, in anticipation of a housing rebound.
  • Buy what is unpopular or unfashionable. Many value investors purchase equities and securities that have some sort of stigma but still make money. Seth Klarman has recently been buying BP(British Petroleum), which is unpopular because of the Deepwater Horizon Catastrophe.
  • Limit risks. A classic value investor values lower risks over higher potential returns. That’s why value investors tend to be conservative and buy established businesses with a proven track record rather than speculative moves, such as IPOs.

There Is No Magic Formula

Stock market value investing is a philosophy of investment rather than a set of rules or a formula for making money. That means there are many different approaches.

Many successful value investors such as Warren Buffett routinely break the historic rules of value investment that Benjamin Graham put forward in his classic, The Intelligent Investor. Graham believed that you should only buy equities that were undervalued. Buffett has often being willing to pay extra for what he considers to be good investments.

The basic principles of value investing and books like Graham’s should serve as a foundation for your investment philosophy rather than a rule book. Successful  stock market value investing is done by deviising your own approach to the market and following it.


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