Value Investing and Control

Using the principles of value investing to select companies and their stocks is based on a few important rules:How many people truly buy stocks and manage their portfolios based on these simple but practical guidelines? Not many do, unfortunately.
It is far more likely that investors, even those who define themselves as 'fundamental' or 'conservative' in their approach, tend to take the easier path of picking stocks impulsively. Someone tells a friend or relative, 'You should buy this stock. It's going to double in value in the next six months.' A common reaction is to immediately buy shares, but without knowing why.

Key Point

Many investors buy stocks on advice from others, but may not know why that is supposed to be a good idea.

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.

Under the value investing approach, you have control when you apply the rules above and when you ask a series of your own questions:Asking these questions puts you in control. Buying stock should be approached on the same basis as that used to buy a home. A diligent home shopper looks at many homes and compares prices and features. The decision should not be made rashly or without completely researching the local market, neighborhood, construction quality, and fairness of the price being asked. However, when buying stocks, the same careful homebuyers might make decisions impulsively and without any research at all. That is a mistake.
By Michael C. Thomsett
Michael Thomsett is a British-born American author who has written over 75 books covering investing, business and real estate topics.

Copyrighted 2016. Content published with author's permission.

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