Wednesday, 24 February 2010

Buying Bargain Stocks (The tenet of Value Investing)

The activities the enterprising investor in the stock market may be classified under 4 areas:

1. Buying in low markets and selling in high markets (Beware that this is Market timing)
2. Buying carefully chosen "growth stocks" (Learn the Paradox of Growth Stocks)
3. Buying bargain stocks (The tenet of value investing)
4. Buying into "special situations" (Only a few will benefit)

From Chapter VI of the Intelligent Investor, to obtain better than average investment results over a long pull, the investor requires a policy of selection or operation that have 2 characteristics:

* it must meet objective or rational tests of underlying soundness (that should prove both conservative and promising); and
* it must be different from the policy followed by most investors or speculators.

Three investment approaches meet these criteria. They differ rather widely from one another, and each may require a different type of knowledge and temperament on the part of those who apply it.

1. Bargain in the Relatively Unpopular Large Company
- concentrating on the larger companies that are going through a period of unpopularity.  Their cheapness are evidently the reflection of relative unpopularity with investors or traders.

2. Purchase of Bargain Issues
- a bargain issue is one which, on the basis of facts established by analysis, appears to be worth considerably more than it is selling for. To make a point, an assumption maybe that an issue is not a true "bargain" unless the indicated value is at least 50% more than the price. This may occur during two circumstances:

* (a) currently disappointing results, and
* (b) protracted neglect or unpopularity.

3. Bargains in Secondary Stocks
- a secondary company is one that is not a leader in a fairly important industry. Due to pronounced preference for industry leaders and a corresponding lack of interest most of the time in the ordinary company of secondary importance, meant the latter group have usually sold at much lower prices in relation to earnings and assets than have the former. It has meant further that in many instances the price has fallen so low as to establish the issue in the bargain class.

No comments: