The 6 core principles of value investing

NNatalie October 17, 2023 5:06 PM

Value investing is a tried-and-true strategy that's been used by some of the world's most successful investors, including the legendary Warren Buffett. It involves buying stocks that appear to be undervalued by the market, in anticipation that their price will eventually reflect their true value. In this article, we will delve into the 6 core principles of value investing.

Understand the business

The first principle of value investing is to understand the business you are investing in. This means doing your homework: studying the company's financials, its industry, and its competitive landscape. By gaining a deep understanding of the business, you can make an informed decision about whether its current market price is less than its intrinsic value.

Look for a margin of safety

The second principle is to look for a margin of safety. This means investing in companies that are priced at a significant discount to their intrinsic value. The greater the discount, the greater the margin of safety. This margin provides a buffer against any unforeseen issues or difficulties the company might face.

Stay patient and disciplined

Value investing requires patience and discipline. Sometimes, it can take years for a stock's price to reflect its true value. During this time, it's important to stay focused on the long-term potential of the business, rather than getting caught up in short-term price fluctuations.

Practice diversification

Diversification is a key principle in value investing. By spreading your investments across a variety of sectors and companies, you can reduce the risk of any one investment negatively impacting your overall portfolio.

Reinvest dividends

One often overlooked principle of value investing is the reinvestment of dividends. By reinvesting dividends back into the market, you can compound your returns over time. This can significantly increase the overall value of your portfolio in the long run.

Always be a learner

The final principle of value investing is to always be a learner. The more knowledge you have, the better equipped you'll be to make informed investment decisions. Whether it's reading financial news, studying the latest economic trends, or continually learning about different companies and industries, it's important to always be expanding your knowledge base.

Here is a quick summary of the 6 core principles of value investing:

Principle Description
Understand the business Study the company's financials and industry
Look for a margin of safety Invest at a price lower than intrinsic value
Stay patient and disciplined Stay focused on long-term, not short-term price changes
Practice diversification Spread investments across sectors and companies
Reinvest dividends Compound returns by reinvesting dividends
Always be a learner Continually expand your knowledge base

While it's never a guarantee, adhering to these principles can significantly increase your chances of success in the world of investing. Remember, value investing is a long-term strategy; it's not about making quick bucks, but about building sustainable wealth over time.

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