Value Investment

May 26, 2012 7:21 PM ET
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MitchSand's Blog
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Contributor Since 2012

Founder of Mitch Financial

The way you select investments ultimately determines how successfully you will manage your portfolio and create future profits. The concept of value investing appeals to many people, especially the more conservative, because it bases decisions on analysis of the basic financial strength of a company, combined with the search for bargain prices of shares. This is the equivalent of buying a car by comparing ratings and performance, and then looking for an attractive discount. The alternative----buying a car based solely on its appearance---is a popular but less successful method.

The alternative, based on predicting the future and then trying to find companies most likely to grow into the assumed scenario, might succeed but it is much less scientific than applying the principles of value investing. The technique of trying to anticipate the future is flawed in the sense that such assumptions are rarely accurate. It may also ignore or overlook some of the basic facts about a company's financial strength, competitive position, product or service trends, and economic forces that are going to affect future value.

Those who try to pick investments based on assumptions about the future may actually outnumber value investors, whose emphasis is on analysis of financial fact rather than an attempt to predict future valuation and stock pricing. Value investing does not require you to predict the future or to be concerned with a variety of unknown influences on future prices. The decision to buy a particular company's stock is based on a study of current value, a history of growth, and application of a few sound fundamental principles.

Value investors focus on individual companies, review the history of growth, read the annual reports, and decide in advance what is a fair price per share of the stock. It is simple and logical, but it requires more work. Once the true value of a company has been, determined, the value investor will look for a buying opportunity. This means they will buy stock in the targeted company only if they can execute an order below the fair value price. Value investors will use this opportunity of price to get the stock they want.

Though value investing is more work for the individual invest in the long run value investing can lead to a better portfolio. But this portfolio will have to be managed at least weekly as value investing is put on the principles of very precise investing and without that weekly management will fail. The reward of value investing is great and greatly over weights the risk. It is a good strategy for a hard core investor and can lead to great success.

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