A look at value investing

Warren Buffet has been known to be one of the smartest investors of all time. He uses several different investment strategies to make his money including value investing. Value investing "involves buying securities whose shares appear underpriced by some form(s) of fundamental analysis." Better said, value investing is buying cheap stock whose price should be much higher than it currently is. Value investing includes taking a good look at the actual value of a stock. You can do this by taking a look at the stocks earnings, its dividends, or its price-to-earnings ratio.

Value investing is tricky because you don't know exactly why the stock may be cheap. It is similar to purchasing a t-shirt for $5 instead of $19. Why is this t-shirt so much cheaper? Does it carry the same value as the $19 t-shirt or do you notice that it has started to fray after its first wash? With stocks, there is usually a good reason why they may be underpriced. There could be some problems with the management of the company that is causing the stock price to be lower. Take a look at the executive report in their annual report to see if the executives are full of false promises. You should also find out about the way the company is run. Faulty management can easily cause stock to drop. Normally the management information of a company is not provided from the brokers and reports you may be getting about your stocks. This is why it will do you some good to get your hands dirty and do some research on your own.

There are other reasons why the value of a particular stock may have dropped. Have the patents expired? How has the company faired when new competitors joined the market? Have there been some product recalls? When a company goes through bad media spotlights, they can easily lose investors and customers. Always be aware of outside circumstances that may be impacting the stock you are interested in. Sadly, a lot of investors don't do the research and they buy the cheap stocks thinking they are undervalued when they really aren't.

Check for market presence when you are using value investing. Small companies probably do not have their names established in the market like the big companies. If you are sold on this particular company, find out what their strategy is to make their presence known. It took a long time for big companies like Starbucks and Dell Computers to build their reputation in the market. This is why their stock is normally of high value because people expect them to stay in business for a long time. The large companies are always worth millions, even billions of dollars and this is due to a hard-working staff and their market presence.

Companies that are well-known like The Gap, Old Navy, Reebok, and Pizza Hut are going to carry a certain level of value for their stock. Since they are well-known, their stock is rarely undervalued. The only reason why their stock will go down is do to bad media coverage of their company due to poor manufacturing or a big problem like food poisoning. If there is some bad media coverage of a well-respected company, this may be the time to buy stock. A lot of investors recognize that customers will stay away from their product until the company sends in their PR team to repair their reputation and re-gain their customers trust. You have a small window to value invest in these large companies so you must pay close attention to the media and the stock tickers. Value investing really depends on how smart you are and if you are able to recognize when and why a stock is cheap and when you should buy it.