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What Do We Mean By "Value Investing"?

Value investing is "the art of buying quality stocks priced at a discount to value".

Most people immediately think to themselves: I can't do my own investing because I have no idea how to recognize a quality stock, and I certainly don't know how to decide its value (what the stock is worth). So I will never know if it is selling at a discount or not.

The negative self-talk usually continues: Besides, I don't have enough time / money / knowledge / guidance / interest /  (circle your obstacle(s), and I have been told my whole life that the stock market can be scary. So I'll just leave my financial future in the hands of other people.

We promise that interested individuals can learn how to recognize a quality company and can learn how to value a share of stock and can learn to see if the stock is selling at a discount or not.

We know this is true because every one of us has already experienced value investing principles in our own lives:

1.We normally have some idea what something is worth (the value).

​In most aspects of life, when we buy something, we have some idea what it is worth. For example, we would not pay $500 for a lamp when we feel it is worth $100. And we do not spend $300 on a pair of shoes that we feel are worth only $75.

 

And yet people buy shares of stock through contributions to company 401(k)'s and mutual funds every single day when they have no idea what those shares are worth.

 

Think of your own life: investing is the only aspect of our lives where we buy with little or no knowledge about actual value.

2.If you have ever bid on something at an auction, you know emotions can rule.

Have you ever raised your number to bid on something at an auction?  Did your heart pound for a few minutes as you compete against someone else? Have you every been lost in the moment and paid too much for something, or seen someone else get overly excited and bid way too much for something?

Or have you sat and watched an excellent item sell for a fraction of what it is worth because people simply were not interested at that moment?

Same with stocks. The stock market is one big auction (look closely and you will see shares are auctioned with a "bid price" and "ask price").

 

Like any auction, excited people tend to get lost in emotion and become overly optimistic and bid up stock prices, and every once in a while people get grumpy and overly pessimistic and sell shares at really low prices.

3.We sense a deal vs a rip-off = the difference between the PRICE of something and the VALUE.

Have you ever gone to a garage sale to find something obviously priced too high, or something priced too low?  Why? Because you recognize a difference between PRICE and VALUE. Price is what you pay, value is what you get.

This phenomenon is so prevalent that they make TV shows on the topic. Ever see the "Antiques Roadshow" where a person buys a painting at a garage sale for $5.00 and it turns out the painting is worth $5,000? The difference between PRICE and VALUE.

Most people have a sense of value of about anything, and they know when something is "too expensive".

We value investors simply apply that mentality - frugal buyers seeking a deal - to the purchase of quality companies at discount prices.  And by the same token, if something is overpriced, we don't buy today and wait for a sale.

4.Many people enjoy the satisfaction of learning and applying their new skills--especially for profits.

 

We value investors enjoy reading about companies and then we use simple methods to find the value of a share of stock.  When the stock price is below that value, we buy and patiently wait for the stock to revert back to normalized value.

 

When the price is well above the value of the share, we usually sell because we know it's likely the share price will revert back to normal valuation. 

 

We then take the profit earned and look for the next opportunity to buy a quality company on sale and start all over again. It's fun to learn and connect talking about stocks.

Can it really be that simple?

Honestly, yes. With the right training and practice and support and patience we can all add some skills to take advantage of actions we already take in our everyday lives.

The Value Valets are living proof that these methods can be learned and that it's fun and rewarding.

We look forward to continuing conversations - happy investing!
 

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