What is the difference between a growth stock and a value stock? In the language of Warren Buffett, growth value multiples should only be applied to companies with a wide and deep moat. Let us say, Bank of America has reported earnings per share of $3.00. Next look at the market price. Graham’s recommendation for the defensive investor would be, in today’s terminology, to stick to index funds.
While I counsel all investors to diversify, be patient, and buy low and sell high, none of these are exactly the one rule. The reason a company is thought to be undervalued is because value investors believe that the stock market overreacts to good and bad news announced by companies in the company’s monthly, quarterly or annual reports.
If the business’ value compounds fast enough, and the stock is held long enough, even a seemingly lofty price will eventually be justified. The consistent dollar cost averaging program setup is one of the best approaches to equity ownership for numerous investors, with dividends reinvested into a low-cost as well as a broadly diversified index.
Putting it all together, Buffett now had the seed of his investing strategy. Value investors search the marker for the undervalued companies. Invest in 20-30 of the highest ranked companies, by acquiring 5 to 7 stocks every 2-3 months over a 12-month period i.e. dollar-cost-averaging.
4) Investing is most intelligent when it is most businesslike. Beyond the projected period of 2011, you impute a terminal value (perpetuity); on the basis that the company is an ongoing business concern (for the stream of future Economic Value Added, assuming a constant yearly growth of 1%).