Active value investment – Know the facts

Value investing has been on the talks for a long time. People have always loved the idea of the value investment as it offers less risk and higher returns even when the markets are volatile.

Numerous academic studies have found out that if you buy stocks at lower price and then sell it at higher price then you can easily increase your chances of making a big shot at the stock market eventually. However, the question is that if value investing works to this extent then how come so many value investors fail to achieve the profits which they should have as predicted by the academic studies and researches.

There are a lot of investors who take to different methods to earn greater returns on their investments. However, all of this is not a game and really not simple that everyone can achieve it. In fact a lot of people get a lot excited when even once they are able to gain a lot of profits, but it is no sooner they lose on the profits because of the wrong investment decisions or on account of  market performance which does not do according to their predictions.

There is no dearth of information and expert advice available on the investment decisions and guidelines to earn more in the market. With the advent of internet, one can get information, guidance and even tutorials for free, at any point of time they want, from the convenience of their home.  All this means that you can take a better decision when it comes to deciding your investment portfolio.  Value investing is all about taking the right decisions at the right point of time. It is more about not taking decisions in a haste or taking too many decisions at the same time, getting panicky by the volatility in the market, it calls for a well thought of investment approach related your financial capability and the financial goal attainment.

SEE: How To Outperform The Market

Valuable Research

Screeners are those who search for stocks and bonds which are being sold at low price but have the potential to increase in price in near future. They judge it by studying the fundamental qualities of stock with respect to earnings, book values or values of the stock.

Contrarians look for value in the least opted stocks and make a prediction that these stocks would soar high. They look for value with a belief that investors would someway make the course of action of these stocks reverse.

Activists purchase large stakes in such undervalued stocks and using their power and knowledge and position they try to push the prices of these stocks in the market and they believe that these stocks would eventually cross shareholder’s value.

Although these three types of value investors viz screeners, contrarians and activists follow different methods but they often face the same sets of problems and challenges. A few of the challenges which they face are a longer time period for buying and selling, putting right amount of diversification, lowering their tax bad credit loan implications and other transaction cost which comes handy with it and to find the zeal to invest hefty amounts in such types of deals. The question is, are these problems so big that even potential value investors are unable to overcome these. Is there no solution to this.

Time horizon conflicts are also one of the biggest problems which one can face and affect the decision of a value investor. Mutual fund managers have to crack short term deals and thus have to cope up with such type of challenges. On the contrary the academic studies state that maximum benefits can be achieved only if the stocks are kept or invested for a longer period of time. Therefore the value investors and fund managers are in a constant tiff between what to follow and for how long they should stall the stocks.

Believe in your decisions and stick to them:

Sometimes media news and negative price action make the investor doubt upon his or her own decision. However, value investing takes long span of time in order to earn returns, as stated by the academic studies. Researchers have predicted that because of various short term price fluctuations and variations value investing techniques might not work really well. If you going for value investing then you must do it for longer period of time in order to earn profits. Stock market is really erratic. A cheap stock can stay that ways for years!

Watch For the undervalued stocks:

Weak fundamentals can also be a reason for making some stocks being cheaper than the others. For example, if a company’s business is riskier then it might fall into a lower price to earnings ratio. This is because it has a lesser chance of growing into a prosperous business or the dividend payout ratio is lesser in this case. Sometimes accounting issues which are faced by companies can make the company look cheap in a very artificial manner.

Diversify, but keep a tab on it:
While you are making a value investment, it is not worthwhile to stick to just any of the stocks. You should invest in a number of stock options across diversified sectors and fields. All this will minimize your risk of losing money and also protect you from sudden losses.

Value investing often calls for a long term investment horizon. Picking the stocks which have strong fundamentals, will not offer you immediate results but have the potential to offer you great returns in the times to come.

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