Value Investing

Is there a way you can put your money to work and earn for you? Yes, there is one such way. It is called value investing. How does it work? To understand that, you need to know what makes a great company great. A company is great when it has-

• a proven and solid track record,
• a sustainable competitive advantage,
• good growth prospects,
• a strong financial position &
• a great management team.

A great company will have, what we call, high intrinsic value. This is the type of company you would want to invest in. So, what is value investing? In a nutshell, you buy shares of great companies at prices below their intrinsic value. Now, imagine the company as a house you just bought. While you own this house, you rent it out for extra income. This rent money you collect are analogous to stock dividends. As the company grows and its profits increase, so will your stock’s value and the size of your dividends. Eventually market prices will match intrinsic value. And when the price of the house skyrockets to exceed its value, you can sell it at that point for a good profit.

But wait a minute. Why would anyone sell you shares at prices below the intrinsic value? This is because markets over-react to good and bad news. That is part of the reason why you see wild swings in the share prices. But, whether the market is bullish or bearish, the intrinsic value of a great company remains unaffected. And when prices fall, this gives you a big opportunity to buy shares of great companies at a huge discount. This is value investing.

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