Value Investing And The Value Trap

One investment strategy is value investing. That is stocks and markets can get oversold and present opportunities for investors to get into quality companies for a low price. If you’re like most stock market investors you’ve heard dozens of opinions on how to invest in stocks but it really boils down to just a few things.

When that quantitative analysis identifies an apparently undervalued stock, the next consideration is ‘undervalued yes, but by how much?’ Because capital preservation is a key issue for value investors, they like stocks which provide a high Margin of Safety (MoS).

The hard part is to determine when a stock price has peaked out, and the best time to sell. By contrast, growth investing is concerned with finding which of today’s acorns will become tomorrow’s oaks. To a value investor, profits are made by investing in quality companies and not by trading.

Look for a price to earning growth ration of less than 1. A good value stock has at least as much equity as debt, twice as much liability as assets and a share price at tangible book value or less. Greenblatt’s “Magic Formula” uses two simple criteria to screen stocks for investing.

Unfortunately, such characteristics, even if they appear in combination, are far from determinative as to whether an investor is indeed buying something for what it is worth and is therefore truly operating on the principle of obtaining value in his investments.