Finding a diamond in the rough is what this is about.
This has to be the most common form of investing that everyone pictures when it comes to making money in the stock market. When it comes to value investing, we are looking for companies that have the most potential for upside in their stock price. If I think a stock that is worth one dollar should be worth $30, what is the reason why I think that? This is the mindset behind value investing. Let me explain. This example is also straight from the books of my personal experience with a stock called Advanced Micro Devices or better known as AMD. In the semi-conductor space, your main competitors are Intel and AMD. Intel technically has a monopoly on this market and AMD is struggling to keep market share. In the infancy of my investing choices, I knew what AMD was, and what their product looked like. I knew just from a superficial standpoint that AMD had a larger customer base, they were a well-known brand, and they haven’t really done anything innovated for some time. I saw their lack of innovation in their stock price back in 2016. The stock was listed somewhere around $1.80 when I first bought 200 shares. I knew how large of a company they were and how they could not possibly go any lower based on my judgement. The day I took a position was apparently the last day that it saw those numbers and two years later the stock is worth around $32 per share.
AMD from 2016 to 2018 is a grade A example of what a value play is in the stock market. It is a well established company that suffered a steady decline in value due to possibly being over-looked and lack of innovation in their product line. 2016 was a turning point for them, because new products were in their future. At the announcement of their Ryzen processor line later on down the road, that still was a good time to invest in this company as a value play. Figuring out which companies are well established and have so much room for upside potential is critical in this strategy. And that really is the main idea of value investing. Find companines that you think are undervalued and invest. It’s that simple.
The interesting thing about this strategy is that it can be a long or short play. In AMD’s case, it was a long-term play or more than one year. We can apply this strategy in shorter time frames and get the same results. When we look at the short-term investment side, we need to look at public perception or the sentiment of the stock (people’s feelings). Public perception or bad news about a company is an opportunity to buy because the underlying business has not changed. If there is bad news about the way in which the company is ran, then that is a different circumstance. This even applies for economic news. When we were having these major diplomatic issues with North Korea last spring, stocks were taking a dive because everyone was shifting their money around in the case of a conflict. International companies were hurt very badly from this news, yet the underlying way they do business was unchanged. After things settled down or the news cycle ended, we began to see these international companies recover from their losses and then move past their tested highs before the diplomatic issues. It was an opportunity to either lower the average cost of your investment or to even buy at a discounted rate.
When you think of value investing, think about getting a good deal on something and then selling it later at an even better price. Our portfolio should contain a few of these stocks, but it really depends on your goals. It is always fun to find those diamonds in the rough and watch them grow to new heights. Value investing really captures the essence of the buy low and sell high mentality.
When looking for value investments, look for:
- An innovative product or new product line
- A 52-week low in stock price
- Large, well established companies
- More potiential for upside than downside
- Restructering of management
- Companies with large amounts of cash
These are generalizations and meant to increase your understanding of the securities market. Any advice contained within this blog is general advice and does not consider your objectives, financial situation or needs, and you should consider whether it’s appropriate for you. The information we are giving you is for educational purposes only.
“Investing is about understanding your risk” and every time you invest in the share market there is a risk of loss. Trading is not for everyone. There is a possibility that you can lose your money. You should only act on our recommendations if you are confident that you fully understand what you are doing