As the saying goes, “Many roads lead to Rome.”
The same with value investing, there are many key aspects you can focus on in choosing to buy an undervalued stock.
Here is two key to be successful in value investing:
Company’s earnings power and whether the stock is selling at a reasonable price.
A company’s earning power will depend a lot on the market it is operating in. If it is operating in a highly competitive market like selling IT products, it needs to have a competitive advantage.
If not, they will not survive in the long run.
There is a good reason for a company to do business in a competitive industry.
The reason might be because that industry is lucrative and perhaps there is still a huge market for them to earn money from despite the market saturation.
However once the market becomes too saturated, the company that survives will be the one that has a competitive advantage.
In investing, we are looking to assess whether the company has a competitive advantage that will allow them to have a sustainable earnings power and can fend off competition in the long run.
Reasonable selling price
No matter how good the company is, it would not be a good investment if we buy it at an overvalued price.
It never is.
This happens when the market is overly optimistic about a particular stock.
The investors in the stock market will then buy this particular stock and drive up the price super high. This happens simply because they are hopeful about the FUTURE of this stock.
However, if the price of the stock has been driven up so high, logically speaking the potential of it going further up is much lower.
In value investing, we always want to buy a stock when it is on SALE.
When does a stock go on sale? It goes on sale when there is bad news about a company. There are many types of bad news, it may be because it missed earnings estimate or when there is a scandal.
We look for opportunity like this and we assess whether it causes a temporary or permanent damage to the company. If it is temporary, we go in!
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