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Top Ten Stock Tips for the Value Investor

By Edited Nov 13, 2013 0 0

1) Invest in What You Know

Investing in stocks can be intimidating. That is why you should not make it harder than it  needs to be. Do not get caught in the trap of thinking that to make money you have to be able to comprehend complex formula's and complicated companies. Stick with what you know. Find the goods or services that you use in your everyday life. If there is a new company having an IPO, ask yourself "is this something I would buy?" Holding companies and big conglomerates take a very technical and strenuous analysis, but it is not necessarily worth the effort or the risk of making mistakes. The most simple companies are often the most profitable because the business model is clear.

2) Find a Good Stock Screener

There are many stock screener's out there which you can pick up for free. They come either in your browser or with an application such as Java. The most important thing to remember here is not to settle for a cursory screener. Find one that digs down through a whole host of different metrics. Yahoo Finance offers an excellent free and in-depth stock screener that is both easy to use and extremely competent.

3) Invest Based on Value Metrics

Unless you want to risk it all as a daring day trader, stick to measuring fundamental value metrics. As a value and growth investor, you are looking to find the true value of a given company. As such, you are trying to see where Wall Street has undervalued certain stocks where you see a very different narrative. Using metrics such as P/E (price to earnings), FCF (free cash flow), ROE (return on equity), ROA (return on assets), PEG (price to earnings growth), and EV (entity value) are essential to value investing success.

4) Time Your Investment

Once you have decided which stock to buy, the next step becomes timing your purchase. Similarly, when you have finally decided to sell, it is important to find the right opportunity to maximize profits. Pay attention to 52 week highs and lows. If you are buying a stock, aim to get it when the stock is near a low. Vice-versa for when a selling a stock. For an even better picture, look at the stock's performance over the last 1, 3, 5, and even lifetime time periods. Get an idea of the story of this stock. Has it been rising steadily since it had the initial IPO? Is it highly volatile, but still overall trending upward? Has the stock lost significant value over time? Make sure you get an accurate picture of where the stock has been in the past before making a transaction in the present.

5) Develop a Personal Investing Thesis 

Develop your own unique philosophy for investing. It helps to even write it down as if it were for public consumption. Most importantly, stick to it! Otherwise you run the risk of irrationally investing in companies without any real discipline. Do not just listen to the "experts" on CNBC or Bloomberg and get your stock picks from these mainstream sources. Be your own person. Over time you can hone your thesis and perfect it through experience.

6) Due Diligence

Do not solely trust others to do the due diligence on a company for you. Reports from other investors and experts can be helpful, but should be only used as a starting point, not the "be all and the end all". If you want to be successful you will have to get your hands dirty. Digging through financial statements is a great way to ensure you can invest with confidence (otherwise it is just gambling). Things to look for include Insider transactions, irregular financial reporting, the true free cash flow available, and any debt that is held by the company.

7) Do Not Invest in Opaque or Corrupt Foreign Countries

Emerging markets offer a great profit potential. By all means, investigate opportunities abroad, but take the time to do a sociopolitical study of the country first. If you have a friend that is knowledgeable in the political or social sciences ask them what they think of a particular country. For example, Russia is a dangerous country to invest in because of the high corruption levels and lack of transparency. China is another example, but the trend is moving towards increased transparency so it is not an apple to apple comparison. The more open the market and democratic the system, chances are the more reliable your investments will be.

8) Beware of the Bubble

The "Tech Bubble" of the late 1990s is only the most recent example of extremely inflated stocks collapsing after a wild sprint to the top. Bubbles are being created all the time. They can be a great ride, but nobody really knows when they will burst. As a value investor, you are looking for predictability and reliability. A current example of a bubble in the making is the "green" bubble. Alternative energy companies and environmentally innovative start-ups are trading at many times true value. The market is betting that green technology will bring tremendous returns. While green stocks may actually bring a good profit, the expectations have been potentially driven higher than the real returns will actually be capable of.

9) Take a Long Term View

It is easy to get caught up in the daily, weekly, and monthly fluctuations of the market. Many novice investors panic and sell stock prematurely based on these variances. Value investors have to be patient and wait for their version of the narrative to play out. Learn to the discipline of brushing off short-term losses in exchange for long-term gains.

10) Define Your Goals

Always have an end state in mind. This holds for both for an individual stock investment and for your entire investing future. What types of gains would you be satisfied with? How much time are you willing to wait for a particular investment to come to fruition? What are your terms for success? Without clear goals, your investment just becomes another place to park your money.


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