The definition of value investing is elusive, more so because it is more of a concept than an actual formula or derivative. It goes beyond just owning stock at a good price, i.e. trading less than intrinsic value; it also refers to selling stock when the market price exceeds a reasonable value for the stock. In effect, value investing is defined as a systematic process of buying high quality stock at an undervalued market price quantified by intrinsic value and justified via financial analysis; then selling the stock in a timely manner upon market price recovery. The difference is a gain improving the investor’s wealth.
Simply stated, the core tenet is ‘BUY LOW, SELL HIGH’.
Furthermore, value investing relies on four principles for success. It includes risk reduction by investing only in high quality stocks, not just any stock no matter how cheap it appears. Thus, penny and small cap stocks are excluded from a value investor’s selection portfolio. Secondly, select stocks with solid underlying assets; this is referred to as purchasing stocks with intrinsic value. Third, use financial analysis, specifically business ratios and key performance indicators to identify worth and trends. Finally, all value investors must understand timing related to buying and selling stock. The key to timing is patience. By reviewing the historical market price pattern for the respective stock, a value investor gains greater confidence and can determine the best buy and sell points to maximize value.
