There are several investment styles you can choose to follow, but value investing has proven to be one of the most successful strategies over time. Although it has fallen out of favour since the 2008 financial crisis, it can still offer value.
Value strategies usually perform the best when the market is under severe pressure. But markets, especially those in the US, have not been under real pressure since 2008.
Instead, the US markets have enjoyed one of the longest bull runs in history. This environment has been conducive to growth strategies, which have become more popular.
So, some investors have started combining other factors with value strategies to capture any growth in markets.
Value investing 101
Value investing is driven by the concept of intrinsic value. It can be considered the cornerstone of value investing and is calculated through fundamental analysis to determine the present value of future cash flows of a specific share or company.
The intrinsic value of a company is generally far more stable than the price the market assigns to a share. This creates opportunities to buy undervalued shares and avoid risks associated with overpriced shares. By buying a share when it’s low, investors can make significant profits when the share’s value rises.
Similarly, given that the share is already trading at a discount, your downside would not be as large. By focusing on a company’s intrinsic value (the numbers), value investors have an edge over other investors who open themselves up to the irrationality of market volatility (the sentiment).
Before committing to a specific share, value investors investigate factors such as:..