Value investing is one particular model of investment that has certainly received its share of bad press over the years. As the dot.com and tech stock investors made out like bandits, value investors were left scratching their heads on the sidelines and second-guessing their tried and true approach to investing.
Analysts claimed that value investing was an outdated practice that simply didn’t belong in the modern stock market. However, as companies such as Nortel grossly inflated the market and traded at 100 times their earnings, the market was sure to level out… and it did, devastating the speculators and investors who had placed all of their eggs in the high performing baskets of the day.
The value investing approach had not been outdated, but remained the common sense, stable approach to investing throughout the dot.com bust. Those who had claimed that the present day market had simply morphed into one unsuitable for value investing were proven wrong on every front.
A concept popularized by influential economist Benjamin Graham, value trading focuses on the overall performance and value of a company, rather than its recent statistics on the stock market as the indicator of its success and future potential. Value investors carefully analyze the financial health of a company before making a decision to buy a share in their business. They look at industry trends, management and staff, past performance, future plans and hundreds of other business planning factors in order to determine whether or not the company is likely to perform well in the future.
Value investors hold their stocks for months, or even years. Because they have researched and intimately know the business behind their stock choice, they can be confident that they will ride out fluctuations in the stock market and come out ahead. While value investing requires a greater investment of time and knowledge in choosing the right stocks, the investor reduces their risk and the level of stress they face over time as their portfolio requires less maintenance.
Investors with the time, stomach and patience to hold onto stocks over the long term statistically come out ahead of the voracious buyers and sellers who monitor and trade their stocks on a daily, weekly or monthly basis. Much of the guesswork is taken out of the game and an occasional review of stock performance is all that is required to maintain a value investment portfolio.