Warren Buffet, have you heard of him? He is a legendary investor and philanthropist who is considered to be one of the most successful investors in the world. With success like his, many investors have attempted to follow his strategy of value investing.
Value investing has a similar goal to fundamental analysis. Both are in search of stocks that are trading for less than their intrinsic value. These value investors can be thought of as extreme coupon shoppers. They are always looking for a good deal.
To find the necessary coupons and discounts to get a deal, an investor may need to comb through financial statements and ratios to determine if a stock is potentially undervalued. However, investing has been made much simpler today with value ETFs.
These special ETFs are made up of several stocks that are believed by the ETF’s managing company to be value stocks. Examples of value ETFs are VTV, VLUE, and RWL.
ETFs are good and all, but they don’t come with as much reward. If you are willing to increase your risk tolerance, searching for single stock can prove to provide higher returns. But what are some indicators of a stock being undervalued? I mean who wants to search financial statements all day.
Luckily, there are several factors that investors do use to discover value stocks.
First up, we have market moves driven by herd mentalities. Since emotions affect many investors' decisions to buy or sell a stock, it results in investors selling right away when a stock drops in value. It’s kind of like the phrase “if your friends jumped off a bridge, would you?” In most cases, yes, many investors would follow suit and sell the stock. With everyone selling, this could present an opportunity for an investor to get in at an undervalued price, but it is important for the investor to know more about the context surrounding the company.
Another common driver is bad news or market crashes. Frequently, bad news will cause a stock to plummet very quickly. If the news is significantly material, investors might be right for selling it. However, this presents an opportunity for companies whose “bad news” might not be too bad and something they can come back from. Market crashes have a similar pattern. Look at what COVID did to the stock market initially. Everything came crashing down but made its way back up, presenting tons of stocks that were discounted temporarily.
Last up, companies that have innovative solutions that frequently go unnoticed. These stocks are often the hardest to find, but if you are able to find them, they can potentially yield great returns. To uncover an unnoticeable company, you may have to do some research or have a strong understanding of a certain industry.
Now, with the proper tools, you too can follow Warren Buffet’s steps. After you get back from finding those discounts, we will get into growth investing.