New York - Unlike investing in fast growing companies, value investing takes a different approach. Value investing is based on a bottom-up analysis of companies to identify undervalued stocks with lower long term risk profiles.
Value investing generally produces a portfolio of "less popular" stocks that may be currently trading at historically low price levels or receiving lots of bad press. Value investing is not designed for short-term investing (generally less than three years).
There are different variations of value investing. Consider the following approaches:
- Balance Sheet Approach - Stock are selected with companies whose current stock price does not reflect strong balance sheets (i.e., cash, accounts receivable or low debt).
- Income/Dividend Approach - Stocks are selected with companies whose common stock dividends or convertible securities that can provide above-average earnings and dividends growth.
- Out of Favor Approach - Stocks are selected based upon finding companies who are currently out-of-favor because of negative press or cyclical concerns.
Value investing requires a disciplined approach to selling. It is important to sell a value stock as it reaches its maximum value or whose perceived "value" is no longer perceived.
Regardless of which variation you choose, it is important to invest in companies whose products are competitive, whose management is skilled and whose overall financial measurements show signs of improvement or no deterioration.
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