If you have heard the names of Warren Buffett & Charlie Munger, this is the investing style that they use. The fundamental idea of value investing is to buy stocks that are undervalued where the value of the stock is greater than the price you pay.
As an example when you go shopping you like to find clothes or phones or items that are on sale. You want to find a good deal, a cheap price for a good quality item. Value investing is like shopping for deals. Instead of shopping for a new laptop or a new phone, you shop for stocks. There are essentially 3 key steps to value investing.
1. Understanding the Business
You wouldn’t buy a business in your local town before you fully understood the business. Its internal components, how it works, its products, how it makes money, the management who’s running it. The same idea goes with stock. So, stick to businesses that you are capable of understanding. This is different for each investor. Some investors will understand gaming stocks more than others because they game themselves, and some investors will understand consumer stocks because they shop there often & know which stores are better.
Every person has a different set of expertise & group of stocks that they can understand. Once a value Investor understands the business secondly they look for ones that have a competitive advantage edge, they look for businesses that are not easy to replicate. They have things about the business that help them beat their competitors.
2. Management with Integrity & Talent
Managers are the ones running your business & controlling the day-to-day environment. If your manager is a fraud this will leak through to the employees & the business itself.
3. Pay a Price that Makes Sense
You should not pay a ridiculous price for a quality stock but you should pay a fair price or heap price.
Dividend Investing
If you are a fan of consistent income you don’t want to wait for stock prices to go up, you just want consistent cash flow then consider this strategy. When business makes money they have 2 key options on what to do with it. One is they can reinvest that money back into the business & look to grow it or pay out those earnings to the owners of owners of stock, this is called the dividend. Normally dividends are paid out quarterly.
The big thing to watch out for through with dividends is consistency. Some stocks will always pay their dividend, some stocks a recession will come & their business will hurt & they cut their dividends, they are inconsistent.
Growth Investing
This investing strategy is for the more illustrious type the guys who don’t mind a little bit of risk. It’s like the attacking style when you play a game of chess. Growth investing is where you invest in companies that have more risk to them, yes, but have more potential on the upside. The innovative stocks, the technology stocks, the disruptive stocks that are changing the world.
Growth stocks like Apple, Amazon, Meta, Alphabet, and Tesla all shut up like rockets. The key to growth investing is to weed out the good stocks with a proper business model from the junk. You have to invest at the start of the bull market instead of at the end of the cycle.
