Is value investing right for you?
Canada Life - Jun 08, 2023
With rising interest rates and inflation should you be considering different investment options? Value investing could help provide you with both risk mitigation and the potential for long-term gains
A new approach to investing may help you manage risk in your investment portfolios
Warren Buffett once wrote: "Whether we're talking about socks or stocks, I like buying quality merchandise when it is marked down."
If that quote speaks to you, a value investing strategy might be right for you.
Do you enjoy scoping out stores for the best deal? Savvy shoppers know that when you pay full price for something, you’re leaving money on the table. Watching for deals and knowing when there will be sales usually pays off. After all, a tv bought at a discount is the same tv for full price. This same theory can apply to your investment strategy.
Value investing is an investment strategy that looks at stocks, bonds, real estate or other assets that seem to be underappreciated or trading below their intrinsic value. Investors who use this strategy are aiming to get a “good deal” on stocks selling at a discount to their intrinsic value. The hope is the stock price will rise as more people come to appreciate the true value of the company’s fundamental business.
What is intrinsic value?
Before we forge ahead to look at the value investing strategy, let’s talk about the basics. Understanding intrinsic value is essential to understanding the value investing strategy. Intrinsic value is a measure of what an asset is worth. You can also think of it as the “true” value of an asset. Many financial analysts believe the market price of an asset isn’t its true value. It’s just what people are willing to pay right now. Intrinsic value looks at the potential of the asset instead. By comparing the intrinsic value to that current market price, you can get an idea of whether the asset is undervalued or overvalued.
Why value stocks may perform well in today’s economy
You might be concerned about today’s rising interest rates and high inflation and wonder if you should consider different investment options given the economy. During volatile market conditions, when investors tend to be more risk averse, they can become attracted to companies that focus on the potential for future growth like value companies that have stronger near-term earnings and cash flows.
Legendary investor Benjamin Graham, considered by many to be the “father of value investing, in his book, The Intelligent Investor notes, “A great company is not a great investment if you pay too much for the stock”. When you invest in value companies you’re considering whether you’re getting a “good deal” now and what they‘ll be worth in the future. They’re also more likely to provide dividends and can provide a bit more of a margin of safety during uncertain times. That means by providing an income component, you’re not just waiting for the stock price to jump up, you’re also being rewarded by the dividends.
Potential downsides to value investing
Value investing takes patience. By its very definition, value investing needs to be a buy and hold approach. You bought it because you believe it’s underpriced so you need to wait for the market to realize the company’s value in the stock price. If you have patience and can wait for the reprice of a value stock the return potential can be sizable. There’s always the potential risk the market may continue to punish a stock, even if it’s fundamentally a fine company. There’s also the possibility a stock may be cheap for a reason. As with any investing, there are no guarantees.
Is value investing right for you?
Value investing isn’t without risk. You must be resilient as well as patient. This strategy is not for someone who wants to buy a hot stock or is looking for a quick win. Value investing can be a great way to grow your portfolio in the long term, but it can take a while for these assets to reach their true value.
I can help you find the right investing strategy to help you reach your goals. Let's talk more about how value investing could help provide you with both risk mitigation and the potential for long-term gains