Value Investing Myths and Facts
The power of value investing is in the control that people take over their own investment decisions. Rather than relying on unsupported claims or promises offered by others, or thinking of the market as a gamble, value investors are able to list out the reasons to buy stock, find companies meeting the requirements, and then act.
Key PointValue investing places full control in your hands; taking any other approach relinquishes control, either to someone else or to the luck of the draw.
- Value investing is based on a study of fundamentals, and fundamentals are expensive and difficult to understand. In fact, with the Internet now a dominant force in the market, a vast amount of valuable, free information is available to everyone. A little bit of study and research proves that using a few well-selected fundamental indicators is not complicated.Much of the information you need can be found in a company's annual report or quarterly financial statement, both of which are usually found on the corporate web site. All of the financial indicators you need can be found on a broker's free research links. For example, Charles Schwab & Co. gives its investors free access to the S&P Stock Reports, which are valuable sources for 10 years of fundamental information.
- The key to value investing is getting stock at low prices. This is not the case. The price itself is not the key; it is the price versus the value of the company. You would not want to overpay for a new home or for a car, and so you shop and compare prices. Value investors do the same thing with stocks. It is not the price per share that matters, but how that price compares to the true value of the company.A stock worth $15 per share could be overpriced based on an analysis of the fundamentals; and a stock priced at $80 per share could be a bargain. The price per share is a relative value, and value investing is not simply a matter of buying low-priced stocks.
- The stock market cannot be beaten with any system, not even with value investing. A pessimistic outlook is built from the way that people invest. If you take that 'hot tip' and buy into a company without checking anything for yourself, you probably cannot beat the stock market. It is quite unlikely that a free hot tip is also going to work out profitably for you.In comparison, value investing is designed specifically to enable you to eliminate riskier choices, narrow down to a few stocks that meet your criteria, identify when you will sell as those criteria change, and make a decision based on analysis rather than on chance. With value investing, you have the best chance for beating the stock market.
- Financial statements are too complicated unless you have a degree in finance or accounting. The belief in the complexity of financial statements is true in one respect: To follow and interpret footnotes, especially those concerned with accounting valuations and highly technical matters, does require a great deal of expertise. However, for making investment decisions, you are going to be more concerned with financial ratios than with the details of the statements themselves.
- These ratios are found on the research services supplied by brokerages and, in fact, are not easily found on the financial statements. The 10-year summary of key financial indicators is of far greater interest than statements themselves, and much easier to find and use.
- Growth stocks provide better returns than value stocks. The popularity of growth stocks cannot be ignored. A growth stock is one expected to report earnings above the average of all stocks, which should translate to rapidly growing stock prices as well. Growth and value stocks have each prevailed in the market about equally. However, a danger in growth stocks is that they tend to outperform the market during big growth spurts, but to fall hard and fast when they end. The dot.com bubble was one such example of growth stock domination followed by a collapse. Over the long term, value stocks compete with growth stocks equally, but are less likely to crash.