There’s a strong sense of accomplishment that comes from investing for yourself; from learning how to find great companies and combining them into strong portfolios that generate superior returns and cash flow over the years.
The only problem: For many people, investing appears to be complex and intimidating and implementing a do-it-yourself investment plan can be frustrating. So much so, in fact, that most won’t ever do it and will instead turn their money over to be managed by banks and mutual fund companies that will inevitably underperform while charging high fees for the privilege.
But it doesn’t have to be that way. All it takes to build confidence in the investment world is some education, a firm grasp of fundamental concepts and an understanding of the methods and techniques used by successful investors such as Warren Buffett.
Fortunately Buffett has been kind enough to share his methods with the world. And as you might know, Buffett subscribes to the Value Investing methodology.
What is Value Investing?
However the term Value Investing can mean different things to different people. Most associate it with a buy and hold mentality, mainly because Buffett himself has said things such as, “our favorite holding period is forever.”
But this isn’t necessarily true. Warren Buffett is different from you and me.
First, Buffett has been known to sell stocks when he has a good reason to do so and, second, Buffett usually purchases large portions of a company and is able to exert significant influence on the company’s board and management to sway them in directions he wants to go. Most investors aren’t in that position.
In addition, Buffett invests Billions of dollars at a time, so it’s not easy for him to easily move in and out of positions.
The result is that you can’t do everything Buffett does. And Buffett can’t do everything you can do.
But that’s okay. There are quite a few Value Investing concepts that can work just as well for you as they do for Buffett.
And while it’s true that Value Investing’s aim is to deliver superior long term returns while lowering risk, this doesn’t mean you should buy a stock and hold it forever.
Although Buffett does look to see if he’s comfortable holding a company for many decades before he invests, he does this mainly to ensure the company’s future looks bright, its quality of earnings is high and it has a durable economic moat.
He has never had a problem selling if something goes wrong.
So if the main tenant behind Value Investing isn’t, “buy and hold,” then what is it? It’s buying low.
When to Buy Stocks
At a basic level, value investors buy a stock when it is significantly cheaper than its intrinsic value. They sell when it becomes more expensive.
More sophisticated value investors also take into account a company’s fundamentals and its economic moat strength.
The common point is that value investors wait until the market gives them what they want. They react to what the market has already done rather than trying to predict what the market will do. And since predicting the market is impossible (this is true regardless of the fact others will tell you it’s not), this is Value Investing’s big advantage.
Okay, so if Value Investing’s main goal is to buy stocks trading for much less than their intrinsic values, it makes sense to find cheaper stocks. The lower the price relative to the intrinsic value, the better.
When to Sell Stocks
But that’s not the sole criterion. Sometimes value investors sell stocks that are currently undervalued.
Why would they do that?
Recall that many value investors also look at a stock’s fundamentals and moat strength. So an investor might hold a stock that remains undervalued even as its fundamentals or economic moat deteriorates. At that point he may decide to sell.
Or, that investor might discover a far better stock to purchase (such as one that offers greater potential returns, has better fundamentals and provides a greater margin of safety) and therefore might decide to sell an existing position and use the funds to purchase the better stock.
So although a value investor could purchase a stock and hold it for a long time, many typically don’t follow the “buy and hold” mantra.
Never simply purchase a stock and then forget about it.”
The main idea is to use logic to guide buy and sell decisions. Never simply purchase a stock and then forget about it. Always be looking at how it’s doing and make the necessary adjustments along the way.
After all, companies’ fortunes change all the time so it makes no sense to hold onto something that has deteriorated in some way when there may be better options currently available.
That’s the smart way to invest in the stock market.
