Tips on Value Investing

Most equity investors would argue that their investment strategy is to find undervalued stocks with the potential to beat the market. What often differentiates investment styles is where an investor looks for undervalued companies. Some search for fast-growing companies, even if their shares are highly valued; others seek so-called momentum stocks that are already going up; and others pick stocks based on technical indicators that they believe predict future stock prices.

Value investors, on the other hand, generally look for shares that appear to be undervalued based on the fundamental aspects of a company's business. Value investing is not for everyone, but it may have an important place in your investment portfolio if the following apply to you.

1. You enjoy the search for stocks that are out of favor based on traditional investment measures (or ones that you devise yourself). A classic value stock may be trading at a price-to-earnings ratio below the average price-to-earnings ratio for the market, at a discount to book value per share, or below the underlying company's break-up value.

2. You are comfortable being a contrarian investor who buys stocks that are down and out and are being shunned by other investors.

3. Your investment time horizon is longer than the next quarter or even the next year. Instead, your aim is to achieve long-term capital appreciation rather than short-term trading gains.

4. You have the patience and discipline to stick with an out-of-favor value stock until other investors also unearth the hidden value you see in its shares and its price rises.

5. You are confident in your ability to evaluate a company's fundamental business prospects. You enjoy the intellectual challenge of doing fundamental research and identifying a value stock that is down because of investor over-reaction to near-term events that don't affect the company's long-term prospects or because investors don't yet appreciate its underlying value.

6. You believe that slow and steady wins the race. Many highly successful value investments are modestly priced shares of businesses with the potential to growth relatively slowly (for example, at less than 10% annually), but steadily long term (making them tortoises) versus the higher-valued shares of faster-growing businesses whose growth inevitably must slow at some point (making them hares).

7. You are comfortable in the company of some of the best investors of all time, including Warren Buffett, who is perhaps the most famous value investor ever.

Value investing is not for the faint of heart. It can take self confidence and fortitude to go where other investors fear to tread and to stick to your convictions when they are saying you are wrong. However, for those with the savvy to ferret out value stocks and the discipline to stick with them, value investing can be financially and intellectually rewarding.