Benefits of Value Investing
Introduction
With inflation rapidly rising in many countries you are faced with the harsh reality of the value of your savings going town. With bank interest rates and real wages not keeping up with inflation, you end up with less disposable income and less savings each year.
It doesn’t have to be that way!
There are attractive investment opportunities such as stocks, bonds, exchange-traded funds, and cryptocurrencies that carry risks but when used properly offer attractive returns to retail and institutional investors helping you secure your financial future and pave the way to your financial freedom.
The choice is yours. what are you waiting for?
Introduction to Value Investing
There are many approaches and investment strategies. The one approach that I’ll share with you is called Value Investing. Extensively covered in the excellent book called “The Intelligent Investor” by Benjamin Graham value investing can be defined as an investment strategy that involves picking stocks that appear to be trading for less than their intrinsic or book value. Value investors actively ferret out stocks they think the stock market is underestimating. They believe the market overreacts to good and bad news, resulting in stock price movements that do not correspond to a company’s long-term fundamentals. The overreaction offers an opportunity to profit by buying stocks at discounted prices — on sale.
This can be illustrated in the simple chart below. We have time on the horizontal axis and the asset's intrinsic value on the vertical asset. Over time the asset price fluctuates around the intrinsic value and is prone to short-term shocks e.g the CEO if the company is involved in some scandal. What often happens is that the market overreacts to such news and a large selloff occurs. The period after the selloff is a perfect buying opportunity. Over time the short-term situation changes e.g a new CEO has been appointed and the asset moves closer to its’ intrinsic price or even exceeds it. This is a great selling opportunity.
The approach was popularized by investment companies such as Warren Buffet’s Berkshire Hathaway or Orbis Investment Management because it is bringing significant returns over the long run. For example, Berkshire Hathaway’s 10-year price total return is 248.9%.
Stock market and alternative assets examples
So far we’ve been talking about value investing only in hypothetical terms. Let’s dig into some real-world examples.
Example 1:
BP p.l.c. is a British multinational oil and gas company headquartered in London, England. It is one of the oil and gas “supermajors” and one of the world’s largest companies measured by revenues and profits. On 20 April 2010 off the coast of the United States in the Gulf of Mexico, a large industrial disaster occurred resulting in the largest marine oil spill in the history of the petroleum industry. This event is still referred to as the Deepwater Horizon oil spill. The impact on the company’s share price was a large selloff by investors in a relatively short period of time. After the large selloff the price of BP’s shares was oscilating between £350-£550 per share presenting an attractive buying opportunity as it was much lower than previous prices and below the company’s intrinsic value. When the world moved on and the company recovered financially period of 2018 offered an attractive selling opportunity as by then the price appreciated approximately 55%. Another value investing event occurred in April 2020 as BP plunged to a loss for the first three months of the year amid rising debt and plummeting global oil prices offering an attractive buying opportunity. As of today company’s shares are 133% up since that period of time presenting an attractive selling opportunity. Both of those cases are visualized in the chart below.
Example 2: S&P 500 Index ETF fund
The Standard and Poor’s 500, or simply the S&P 500, is a stock market index tracking the stock performance of 500 large companies listed on stock exchanges in the United States. It is one of the most commonly followed equity indices. As an investor, we are able to buy shares in an exchange-traded fund (ETF) mimicking the movement of a given index such as the S&P 500.
In 2020 as a result of the panic caused by the global COVID-19 pandemic a lot of large companies were affected financially. This led to a massive 29% drop in S&P 500 offering a great buying opportunity. Since then the world has moved on and in 2022 the price was up by 105% offering an excellent selling opportunity. This is illustrated in the chart below.
Example 3: Bitcoin
The last example is from the cryptocurrency world. Although the value investing concept was designed for shares I believe it can be applied to alternative assets as well.
Bitcoin is a decentralized digital currency that can be transferred on the peer-to-peer bitcoin network. Bitcoin transactions are verified by network nodes through cryptography and recorded in a publicly distributed ledger called a blockchain. The 1st Bitcoin bubble started forming around 2017 and it seems insignificant compared to the next bubbles happening in subsequent years. After the 1st bubble collapsed in 2018 the asset price remained in a consolidated market with lower volatility and trading volume for a prolonged period of time offering a great buying opportunity for believers in blockchain technology. Consolidation is the term for a security that is neither continuing nor reversing a larger price trend. Consolidated assets typically trade within limited price ranges until another trend emerges. The 2nd bubble started forming in 2020 offering an excellent selling opportunity with a price appreciation of more than 700% in some cases if bought during the consolidated market after 2018. After the 2nd bubble collapsed around May 2021 there was another buying opportunity where a smart investor could sell some Bitcoin in the autumn of 2021 with an appreciation of more than 80%. Since then the price collapsed again and recently settled at the price of around 20,000 GBP per Bitcoin offering another potential buying opportunity.
Challenges with Value Investing
- It’s a long-term game: It may take some time for the asset below its’ intrinsic value to reach or exceed its value.
- Contrarian approach: As an investor, you need to be comfortable with going against the crowd. This may mean being in a negative position for some time until the asset starts appreciating again. This takes discipline as some people are uncomfortable with short-term losses and decide to sell their assets too early leading to a loss of capital.
- Research takes a long time: Identifying undervalued assets is very time-consuming because it involves screening a huge number of securities and it’s impossible to do it as an individual even if treating it as a full-time job. Most people have other paying jobs and don’t have time to dedicate so much time to research. The paragraph below presents an answer to this problem.
Automated Value Alerts
A website called Value Alerts offers you a subscription service to notify you about the latest stock market and cryptocurrency investment opportunities. It’s based on the automated screening of thousands of tradable assets and selecting the currently undervalued ones.
The selection is based price movement, volatility, volume and financial valuation. It focuses on identifying assets that had large sellofs in a short period of time and reached price consolidation, meaning that investors significantly reduced their selling activity of the asset and the price settled on a particular narrow range for a prolonged period of time. This ensures that you won’t buy the asset in the middle of the selling spree but you can enter the trade when the investors got bored of selling. This an be illustrated by the chart below, where you can see a large selloff in end of March 2021 and price consolidation starting in April.
Once subscribed it provides you with a regular email list of assets with attractive prices. An example of a regular subscription email looks like the following:
It lists the asset name, link to a time series price chart, symbol code of an asset, and description of the asset e.g cryptocurrency, growth stock, exchange-traded funds, etc.
I’m sharing it with you because it saved me a ton of time on investment research!
You can use the code NEWJOINER to get a free 2 weeks trial.
Link to the website: Value Alerts Website
Conclusion
Now that you’re equipped with an understanding of value investing and were given access to the best tool that will help you save time on researching undervalued assets, I want to wish you all the luck in your investment journey and I hope that you’ll reach your financial goals!
