The main principle behind value investing is to buy companies that are undervalued by the market. An investor who uses a value strategy makes money when the share price of the company increases in value, and in the end, is priced equal to its intrinsic value in the market.
A value investor ignores day-to-day price changes and stock price volatility. You are pushing to make a profit in the long run when the market is "ready" to price the company "correctly".
In order for a value investor to access the "correct" intrinsic value of a company, you must perform a fundamental analysis that is based on the financials. There is also the subjective opinion of the investor who does the analysis. Finding stocks that are "undervalued" may require a good deal of research. It can take a long time before the stock price rises and reaches your estimate for the correct valuation of the company. It is therefore important to have a long-term outlook for your investments as a value investor.
Value investing is not just about buying "undervalued" stocks, it is also about buying "quality undervalued" stocks. It is therefore important to know what presents a company/stock with high quality.
That means that you are not just buying a company, for example, because it is "cheap" compared to a low P/E ratio. You may then end up finding out later that this ratio was low because the company was poorly run and that the business model was not sustainable.
Good indicators for finding companies and stocks that are of good quality and are "undervalued" after value investment principles are:
The share price is no more than 2/3 of your calculated intrinsic value when buying.
It is a low P/E ratio - you, therefore, pay less for more profit
The growth ratio of the P/E is lower than 1, which is an indicator of low the valuation of the company is
A low P/B ratio - is an estimate of how much money is left in the company if operations are terminated and liquidated.
Payment of high dividends - can be used for comparison against other companies in the same industry.
A large increase in growth and turnover - for the stock price to continue to increase, the company must continue to grow in earnings and turnover.
Good results - show that the company is well managed and delivers profits.
As you can see, there are many factors you can use to assess the intrinsic value of a company. It is therefore up to you as a value investor to find out which fundamental indicators are best to use for the specific companies that you want to consider. You should access the further management of the company, and make sure that the company continues to deliver good results, and has the qualities you are looking for.
As mentioned above, you must wear "the long glasses" as a value investor. You must have faith that your assessment has been right and that the market will price the company "correctly" over time. Experience is something that is essential as a value investor. Gradually, you will more easily see what are good "quality companies" and which are not worth giving any attention to.
value investment invest in value value investment invest what is value investment invest