Recently, we’ve been talking about stock picking strategies. Which ones work, which ones don’t, and more importantly, how to tell the difference between the two. In particular, we’ve looked at fundamental analysis and qualitative analysis, two of the major schools of thought when it comes to determining the inherent value of a company that one is considering investing in.
Mechanical stock picking strategy
Today, we’ll switch gears a little bit and look at a stock picking strategy that’s a little more mechanical in its approach. This is known as value investing. Value investing is often considered to be the most fundamental of all strategies, and as such, it’s thought to be rather sound in most cases.
Value Investing
When one practices value investing, one tries to find stocks that are said to have strong “fundamentals” as a result of investigating them with fundamental analysis. The “value” of a stock is determined, however, not just by the strength of its fundamentals, but also by the price at which it’s selling. A good value investor, only looks for strong companies whose stock is currently selling at a very low price because the rest of the market mistakenly thinks of that company as being rather poor, and “undervaluing” it. The idea is, basically, that there’s nowhere for that company to go but up, and the value investor is among the only ones who can see that.
The good value investor
Of course, just buying any old cheap-o stock isn’t going to fly. The value investor, more than those who use other strategies, has to really know something about what he or she is investing in. They must recognize that one is really investing in a “company”, not just in a “stock”. That company is run by people; it’s supported by numbers and strategies of its own. By looking at these, a good value investor can confidently assess that a company is really on its way up rather than its way out.
As a combination of both fundamental analysis and qualitative analysis, value investing is one of the most lucrative and powerful investment strategies out there for a trader who is willing to do his or her homework.
See you next week for part 4 of Stock Picking Strategies.
Sean Rasmussen
The Bullhunters Guide
Universal Wealth Creation © 2004 – 2008
{ 3 comments… read them below or add one }
OK so Value investing is a combination of fundamental and qualitative investing. It is good to remind people that stocks on share market are actually companies with real people working in them – and shareholder profits should be equally important as Wages and Working conditions for Real people in these companies. Sadly sometimes this does not happen
Hi Sean,
This is when it would be very beneficial to be well acquainted with the major players in each of the companies that you’re looking to invest in. What might look bad to an outsider will look good to someone who understands what’s going on inside the company.
Value investing really seems like a great strategy to use.
I like the thought of value investing as you are dealing with a companies here and the people who run them.
It would be very interesting to investigate and find out more about the companies.
In the type of trading I do, I don’t go into that depth but I can definitely see the advantages.