Hunting for Hidden Gems: Intro to Value Investing

It's a common misconception to believe that stock price is directly correlated to a company's day-to-day performance. Instead, the stock price is based on the buying and selling of its shares by investors. But, this isn't to say that a company's performance does not have an impact on its share price.

Value investing is a long-term investing strategy where investors pick stocks based on their intrinsic value. Value investors look for individual stocks that they deem, “undervalued”. Once a value investor finds an undervalued stock they hold the stock for long-term growth. A company can be undervalued for many reasons ranging from being small-sized and overlooked to short-term negative news. This typically causes others to see value investors as contrarians. While disastrous news can drastically harm a company's public image in the short term, value investors see that over the long term, incidents tend to have an isolated effect. Additionally, the long-term approach of value investing requires patience because one's portfolio will fluctuate with economic cycles over the short term. Generally, value investing is seen as a safer strategy of investing compared to strategies like day trading and options.

Warren Buffet, the CEO of Berkshire Hathaway and famed investor, used value investing to build his wealth. His approach to investing revolves around seeking out undervalued companies with strong competitive advantages, reliable earnings, and competent management teams. This led to his famous quote, "Price is what you pay; value is what you get." Throughout his career, Buffett has demonstrated a contrarian approach, often going against prevailing market sentiment and patiently waiting for the right opportunities. His long-term perspective and aversion to market speculation have enabled him to navigate various economic cycles successfully. Warren Buffet created a track record of successfully outpacing the S&P 500 over several decades with his long-term thinking and value-centric approach.

It is important to note, that before investing in a stock value investors conduct a lot of research, diving into each company's financial statements and assessing its value based on competitive advantage and profitability over the long term. The P/E Ratio (Price to earnings) shows the value of a company compared to its past self as well as competitors within the same industry. A lower P/E ratio in comparison shows the possibility of a stock being undervalued. Also, a low debt-to-equity ratio can show a stock is undervalued. A company with a healthy interest coverage ratio suggests that the company has manageable debt levels and may be financially stable. Next, Free cash flow represents the cash a company generates after accounting for capital expenditures. Positive and growing free cash flow can indicate that the company has the financial flexibility to invest in growth opportunities, return capital to shareholders, or weather economic downturns. While these are not all the measures a value investor looks for when determining the intrinsic value of a company, these are good starting points for new investors.

Value investing focuses on long-term growth in securities that are in good financial standings, have the possibility for future growth, and are undervalued by the prevailing public opinion. This leads to an investing strategy that is seen as less risky and favored by famed investors like Warren Buffet. For those wanting to begin value investing, educating yourself on the workings of a financial statement and varying measurements of stocks will go a long way.