What is Value Investing?

When you think of some of the biggest names in investing and stock market history such as Warren Buffet, you are usually thinking of value investors. Think of this strategy like searching for shares that are on sale; for whatever reasons, their share price seems lower than the value you expect it to be, and it would be a bargain to pick up.

Valuations

The valuations and fundamentals of companies targeted in value investing generally have low Price-to-earnings ratios (P/E Ratio) in comparison to the industry they are in. This is a key metric when assessing whether a company seems like a growth opportunity or a value opportunity. Growth investing targets companies with much higher growth potential, and therefore inheritably higher P/E ratios generally.

Strengths

Many investors don’t have the time or energy to follow stocks and financial news all the time. This is where value investing can home in handy. Since the strategy revolves around picking solid companies who’s fundamental metrics are rock solid, and holding from for long periods of time, it is much more passive friendly.

There are many mutual funds or ETFs that target specifically value picks. Investing through an ETF or Mutual fund will allow you to remain diversified as you will be invested in a large array of different financially sound companies.

Limitations

When value investing, you are in it for the long haul. It is not as friendly to buy and sell often, because you are investing in companies you believe are currently undervalued and could take a long time to recover. This strategy goes hand in hand with the old “Buy and Hold” saying.

Holding investments for long term gains based on perceived value may mean you miss out on the current big hitters that are leading the momentum of the market at the time. Many of the biggest gainers might not be picked up in this strategy because they are often trading at very high multiples as investors believe their growth is promising.

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