Value Investing
February 28th, 2008 Ogbuotobo Chuks || chuks@stockmarketnigeria.com
By Ogbuotobo Chuks
You are a value investor if you are keen on buying undervalued stocks. Undervalued stocks are those with low price earning ratios, those trading at prices that are close to their basic asset values or those selling at prices that are less than the liquidation value of the stock.
There is merit in buying undervalued stocks. In each of the above cases, the main attraction of value stocks is that there is a hidden value that the market is yet to capture. The idea is to get in before the market begins to sense that potential. A low price-earning ratio, for instance, means that the company in question has a bigger earning capacity than the market has been able to reflect on its price.
Sooner or later, that earning capacity will begin to jerk up the market price. A low price-asset ratio also means that the market is at that point not capturing the earning potentials of the company.
What it takes to be a value investor
The merit in value investing is the opportunity it offers to someone who enters a stock before it suddenly makes a turnaround. The risk in it is the chance that the company never gets a chance to make the big turnaround move that is needed to create the anticipated fortune. Most people like to buy stocks when the prices are moving up; the value investor does the opposite. He looks for companies that are beaten down or are yet to come to the limelight. The courage to take extra risk is what is required to be a value investor.
One of the attractions of value stocks is that they tend to hold up when the market is going down. They hardly go significantly down, being almost at par with the asset values already. Being undervalued, these stocks usually don’t fall as far as growth stocks do. Also some of them pay dividends that amount to above average dividend-price ratio. This compensates for the price decline.
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