Wow what a controversial title but I felt like there are so many misunderstandings about the term value investing out there so I figured I would make a quick blog post to share some thoughts.
Many people assume that value investing is about buying deadbeat stocks and then selling them when they just move up a bit but this isn’t correct.
Like they think that a value Investor would just run a scanner look for Low PE stocks and then buy whatever is cheap. This is certainly not the case ( although there could be lost of great opportunities in this list).
There is a form of Value investing out there called net net investing but this is just a version. It is not what value investing itself is all about.
So what is value investing then?
The answer is in the name itself : Value. Value Investing is seeking something that is trading below its real value. As in the market doesn’t notice the real value of a company.
This value can come from overlooked growth, overlooked assets on the balance sheet and and many other things.
This is where your research and thinking comes in.
One sample could be that you identify that a company is growing it’s earnings pretty fast but the market didn’t notice it and it’s selling like its about to go out of business. This could be the holy grail of investing.
In another case the value could come from assets on the balance sheet that the market doesn’t realize.
It could also be a turnaround story. As in a company was beaten down so much and is trading as it’s about to go out of business but you could discover something the market was missing. Maybe the company launched new products and things are about to move up again. Once again this is why research and paying attention is so critical.
Value can have many forms. And the growth of a company is also just a variable among many.
Many people think that there is a difference between growth and value Investing but in a way this thinking is nonsensical.
Because when people value a business they take Growth of earnings/revenue into consideration. In the end it all depends on future cash flows. How much can a Company earn in the future and what am I paying for this cash flow today.
Basically any company can be a value investment.
You found a cyber security company thats growing at 60% a year but the price of the stock didn’t move at all because the market didn’t notice it? Bam this could be a great value investment.
The critical part is the price you pay for a stock. Whats the point of prepaying 100 years in advance for uncertain cashflows? High chance is that this would not be a great value investment.
Value Investments can be found anywhere and in any sector. It could be tech it could be cyber security anything. It could even be a bakery stock. It really doesn’t matter
What matters is the price you pay today for cash flows in the future. And then try to predict those cashflows as good as possible based on research and thinking.