Warren Buffett is one of the most successful investors in history.
He once wrote of his strategy: “Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down.”
Buffett’s bargain-hunting approach to the stock market is commonly known as value investing — a strategy that investors have been studying and practicing for nearly a century.
Despite Buffett’s success, value investing has had a mixed track record in recent decades. Historical data suggests that value stocks lagged behind other kinds of stocks from the 1990s to the late 2010s.
But some experts believe that’s changing in today’s rising interest rate environment.
What is value investing?
In simple terms, value investing means buying stocks that you think are worth more than their current market price.
In other words, value stocks are companies whose share prices are lower than they “should” be, judging by fundamental financial metrics such as earnings per share.
Some value investing strategies involve buying stocks that have fallen out of favor with investors, in the hope that their strong fundamentals will propel a rebound in their share prices.
Value stocks are often contrasted with growth stocks, whose appeal is based on rapid increases in earnings or revenue.
“Generally, value stocks have better fundamentals than growth stocks,” says Michael Chomiak, an investment manager and financial advisor at Access Wealth in East Hanover, New Jersey.
“They’re usually more mature businesses that pay steady dividends, and that have free cash flow,” he says.
Given its focus on consistent fundamentals and comeback stories, value investing tends to be more long-term-oriented than growth investing. Buffett once wrote that “our favorite holding period is ‘forever.’”
Chomiak agrees. He says value stocks “are more of a consistent grower over time than growth stocks.”
How do you find value stocks?
Value investors use a variety of metrics to identify bargain-price stocks. Chomiak says…
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