Value Investing and Control
- Base decisions on a study of the fundamentals (see Fundamental Analysis). Anyone can grasp and master a few important fundamental indicators and trends.
- Compare companies to rank their quality.
- Be aware of price swings and volatility.
- Remember to include dividend yield in your analysis.
- Once you buy, don't worry about price changes; remember, the market rewards patience.
An intelligent approach would be to respond with a question: 'What criteria did you use to reach that conclusion?' In other words, why will the stock double in value and how do you know that? You will find that the person giving you the advice either has no criteria to rely upon, or has based the conclusion on a simplistic indicator. For example, the company has been growing at double-digit rates, it is about to introduce a new product, or it is going to benefit from new federal legislation. Those factors might influence stock value, but they do not guarantee anything.
Key PointMany investors buy stocks on advice from others, but may not know why that is supposed to be a good idea.
Under the value investing approach, you have control when you apply the rules above and when you ask a series of your own questions:
- Is the stock currently fairly valued, overvalued, or undervalued?
- What criteria determine this conclusion about valuation?
- Is this company dominant in its industry?
- What is the recent price history and level of volatility?
By Michael C. Thomsett