Investing word of the day: Value Investing

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source: http://www.schloss-value-investing.com

I have been writing about this term just like in my post Stock Trading vs. Stock Investing and it is related to my post Investing word of the day: Market Price

Lets get a formal definition of these term from Investopedia.com

The strategy of selecting stocks that trade for less than their intrinsic values. 

Also I have been discussing intrinsic value in conjunction with value investing. Intrinsic value is the actual value of the stock after considering current results and future earnings and valuable events that will benefit the company and will make the company profitable in the near future.  

Now do you see why the likes of Warren Buffett take advantage when stocks of great companies like his very own Berkshire Hathaway Inc. (BRK/A) which currently trades at $110,300 per share buy when the market price of such stock goes below its intrinsic value?

source: www.bloomberg.com

In times like this Value investing is one of the best strategy one can employ. Yes the stocks are low so low that your regular monthly savings of 5,000 pesos can now buy 2 or more lots of stocks as compared before. It is a way of positioning one's self before the rise of such great stocks. Though it may take some time before these great stocks shine, their intrinsic values cant be ignored. 

Once these stocks pick up and rises traders will be running after it hoping to ride it but as for those who have purchased it when it was still so low we are seeing a 2, 3, 4, or even a 5 bagger profit on such stocks.

Value what is it?

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 source: http://www.makemoneyonlineafast.com

I was reading Bo Sanchez's blog post and a line struck me. 

Here’s the equation: Problems create scarcity. And scarcity creates value. And value creates success.

 (to read Bo Sanchez's blog post click here)

Let's put that in logical argument:

Problem created Scarcity

Scarcity creates Value

Value creates Success

Therefore : Problem creates Success

Now there is one truth we can pull out from this logical argument, that is Scarcity creates Value. This line is actually what the Law of Supply and Demand teaches.

If you remember: if supply of a commodity is low demand for it rises, when demand for it rises people are willing to buy it at even higher price thus there is a need to raise its price to control such scarce commodity. It is also applicable to thew stock market.

When a certain stock has started to pick up volume after some favorable report or occurrence  the price will start to go upward as indicated in the MACD graph. Such reports like a higher reported quarterly bottom line than expected, a new investor putting in needed capital to enhance or expand the business, or probably a sudden favorable business opportunity that puts the company in a position to profit big can affect investor and speculator perception alike.

When everyone wanted that stock it starts to be scarce. Those who has it already will hold it until it reaches their target price before releasing. Big players will buy in blocks thus limiting the number of shares available. As this happens price action starts to go north and small players try to ride it leading to price trend upward.

source: http://www.clickjobs.com

When a commodity becomes scarce its value rises that is how many investors pocket big gains. Wise investors starts to accumulate stocks of value when they are not yet scarce meaning they are not yet in demand. They keep on accumulating and they are even happy when the price of the stock they are accumulating still goes down. But remember they don't just buy a stock, they have carefully analyze it and base on some analysis they believed that it will grow in the near future. They accumulate stocks with great potential thus they are unafraid to accumulate such stock.

source: http://radocracy.com

The Philippine stock market is now on the expected correction, this is one of the best time to accumulate fundamentally sound companies. So do your due diligence and don't wait for the time that the stock you want to accumulate becomes scarce. 

SCARCITY CREATES VALUE  

Value then is define as a status when it is in demand and when it is limited. That is why gold is valuable because we have to dig deep to get it. That is why experts charge us hefty fees for their advice and services. Valuable stocks are themselves valuable because everybody wants it and are willing to pay the price.