Thetrickforvalueinvestorsistotakeadvantageofthesemoodswings。

Theyfindstocksthathavebeen‘unduly’punished,andseentheirsharepricesplunge。

Theywaituntilthemarketrealisesitsmistakeandthesharepricerecovers。

Andthentheysellthem。

Thisprocesscantakesometime。

Butwhilevalueinvestingisoftena‘buyandholdforawhile’strategy,it’snot‘buyandholdforever’。

Ifyouwanttomakemoneyfromvalueinvesting,youhavetotakeyourprofitswhenastocknolongerrepresentsgoodvalue。

Andit’snotaseasyasitsounds。

Everyonethinkstheycanbeatthemarket。

Everyonethinksthey’reacontrarian。

Butsuccessfulvalueinvestorshavetodigdeepandhaveaverystronggraspofhowtoanalyseacompany’s‘fundamentals’。

Thatis,theyneedtoknowhowtogothroughitsaccountswithafine-toothcombandcalculatethestock’s‘fair’value。

Grahamalsotalkedabouttheimportanceofhavinga‘marginofsafety’。

Inotherwords,youwanttobuythestockwhenit’stradingwellbelowitsfairvalue,sothatyourdownsideislimited。

Inshort,thisisafarmoreactivestrategythanincomeinvesting,butitcanpotentiallybeextremelyprofitable,nottomentionsatisfying。

We’llbelookingatvalueinvestingandhowtoanalyseasetofcorporateaccountsinalotmoredetail。

Thehuntfortheten-bagger

Growthinvesting,asthenamesuggests,focusesmoreoncapitalgainsthanincome。

Withthisstrategy,investorshopetofindcompaniesthatcangrowtheirprofitsrapidly。

Ifthishappens,theyreasonthatthesharepriceofthecompanywillgouprapidlyaswellandtheywillmakealotofmoney。

Youwon’tfindgrowthcompaniespayingbigdividendstoshareholders。

Allthecompany’sprofitsandcashflowstendtobereinvestedbackintothebusinesssothatitcangrow。

Thesecompaniesareoftensmallstocks。

Andit’snotuncommonforthemtobemakinglosses。

Forexample,acompanymayneedtoinvestinnewfactoriesandequipmenttomakeitsproducts。

Oritmaybespendingalotofmoneyresearchinganddevelopingitsnextwinnerbeforeitmakesanysales。

Thismeansthatyouwon’tfindthesekindofcompaniesinthebargainbasementofthestockmarket。

Theirshareswilllookexpensiverelativetotheirprofitsorassets。

Valueorincomeinvestorstendtosteerclearofthesetypesofstock。

Youcandoextremelywellbuyinggrowthcompanies?

InvestorssuchastheAmericanPeterLynchmadelotsofmoneythisway。

However,youhavetodoyourhomework。

Thisgoesforallstylesofinvesting,butit’sdoublyimportantwhenbuyinggrowthstocks。

Backthewrongcompanyorpaytoohighaprice,andyouoftenhavelittletofallbackonwhilstfacingtheprospectofbiglosses。

Sowhenlookingatagrowthstock,youhavetohavealotofconfidenceinacompany’sproductsandbusinessmodel。

Youhavetobelievethatitwillbeabletosellitsproductstolotsofcustomers,withoutlotsofcompetition。

Theclassicexampleofthisadvicebeingignoredwasthedotcomboomattheendofthe1990s。

Peoplethoughttheinternetwouldseerapidgrowth–whichturnedouttobetrue–buttheyignoredthefactthatitallowedcompetitiontoflourishaswell?

Somecompaniesthatfloatedonthestockexchangeatveryhighvaluationsbecameworthlessveryquicklyastheirbusinessmodelsandproductswereexposedtocompetition。

Anotherexampleistheairlineindustry。

Thebusinesshasgrownrapidly–morepeopleareflyingthaneverbefore–butthisrapidgrowthinairtravelhasnotmadeinvestorsinairlinesrich。

Theairlineindustryhasmadeacumulativelosssinceitbegan,becausethereistoomuchcompetition。

Theotherthingtobearinmindisthepriceyoupayforgrowthstocks。

Therearecertainlargesuccessfulcompanies,suchasCoca-Cola,WalmartorProcterGamblethatwouldgenerallyfallintothe‘growth’categoryratherthan‘income’or‘value’。

That’sbecausethesecompaniesaresohighlyprizedthattheyrarely,ifever,become‘cheap’ininvestmentterms。

Yettheirconsistentabilitytogrowprofitshasstillseenlong-terminvestorsdowell。

Butthesecompaniesarenotabuyatanyprice。

Overpayingforgrowth–becausetheygetsuckedinbyhypeisacommonmistakethatinvestorsmakeandamajorreasonforlosingmoney。

Sowhileyouwon’tfindthesestocksinthebargainbasement,youarelookingtopayreasonableprices,notsillyones。

We’lllookatvariousfinancialratiosthatcanhelpyoutodothislaterintheseriestoo。



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