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1. Finding great companies whose stock prices are actually lower than their true worth
2. Buying and holding them until the market realizes or reach their real value
Key Idea:
The idea behind this is getting value for the price you pay.
How Value Investing Works (With Simple Example)
Let's just say that Company ABC makes:
- $10 million profit each year
- Has $50 million cash in bank
- Stock price values it at $80 million
In that case, a value investor would quickly think this way;
This company is actually worth almost $150 million which is assets + profits, but if I bargain well, I can actually buy it for $80 million. That's the whole idea behind Value Investing.
4 Easy Steps to Start Value Investing
1. Look for Undervalued Stocks. To look for undervalued stocks, use financial ratios like:
- P/E Ratio (Price/Earnings) < 15 = potentially cheap
- P/B Ratio (Price/Book) < 1 = selling below asset value. Using these formulas let you know what stocks are undervalued.
2. Find Strong Companies
- Look for companies with consistent profits for 5+ years.
- Consider company with little debt (Debt/Equity ratio < 0.5)
- The company should also boast of good management. You can do this by checking the CEO interviews.
3. Buy When Others Are Fearful.
-I can tell you categorically that the best opportunities come during market crashes/recessions
4. Hold Long-Term
- It's advisable to wait for a period between 3-5 years for the stock to reach its true value before trading it.
5 Famous Value Stocks in 2025
1. Bank of America (BAC)- This is trading below book value
2. Verizon (VZ) - This is high dividend with low P/E
3. Toyota (TM)- It's a very strong brand with reasonable price
4. Alibaba (BABA)- It's a Chinese giant trading at discount
5. Pfizer (PFE).- It's a pharma stock with a whopping 6% dividend
Common Mistakes to Avoid
It's a grave mistake to buy "cheap" stocks without checking financials When you panic sell especially when price doesn't move immediately as you expected. Ignoring economic trends completely is a very big issue for investors. Putting all your money in 1-2 stocks is another grave mistake.Why Value Investing Works in 2025
- It works in all market conditions.
- It doesn't really require you to watch the markets daily
- It's proven by decades of success. According to records, Warren Buffett made $100B+ this way.
- It's a perfect investment for the patient investors.