By Nimi Akinkugbe

Value investing is an investment approach that is based on the premise that with some effort, you can find good, strong companies whose share prices have fallen, so offer good value for money. It was made popular by Benjamin Graham, and Warren Buffet, who largely based his investment decisions on the tenets of value investing and used this approach to build his extraordinary fortune. According to Warren Buffet, “value investing is the real form of investment, anything else is pure speculation.”

Assumptions of value investing

More often than not, the stock price does not reflect the real value of the stock itself. Market volatility, emotions and fear drive price volatility. The result is that stock prices will be either overvalued or undervalued at a particular time.

Nobody knows exactly when the market will reflect the stock’s true or fundamental value; it could take months, years, even decades. However, its future prospect and potential growth is the best indication of a stock’s true value. Fundamental analysis helps one in uncovering hidden gems in the stock market. Such companies would usually have valuable assets, a strong balance sheet reflecting stable earnings and dividend history with potential for growth, an experienced board and management team, and would command a sizeable market share. How a company’s financials stand, its credit ratings, and industry outlook; all these come into play and are key to fundamental analysis.

Value investing is somewhat subjective and two investors may have exactly the same information on a company and yet place differing values on it using different valuation methods. Companies of different sizes or in different sectors may differ in terms of what is considered to be of good value. For example, what is cheap for a banking stock may not be cheap for a company that produces consumer goods.

Value investing thrives on fear and uncertainty

Markets often over react to negative news with the result that good stocks fall far below their fundamental values along with less attractive stocks. Value investing relies on the psychology of fear in the market. When there is fear in the market, many “investors” start to sell in a panic. In this process, some attractive stocks fall below their fundamental values ready to be snapped up by the discerning Read the rest of this entry »

One of my favorite investment sayings is attributed to value investing legend Shelby Cullom Davis: “You make money during bear markets; you just don’t know it at the time.”

Davis’ point, much like Warren Buffett’s oft-quoted “be greedy when others are fearful” advice, is that opportunistic contrarians can set their portfolios up for great returns by buying when and what others are selling.

Unfortunately, many investors also lose their money during weak markets. They panic-sell and upend what had seemed like sensible investment plans when cooler heads prevailed. Then, when the market inevitably begins to ascend again, they’re left with that nagging question: Is now the time to get back in? I’m still getting emails from people who moved to cash during the last downturn.

But telling people to stay cool or go run around the block (my mom’s favorite advice for restless kids) can seem platitudinous on days when the market drops by 500 points. And let’s face it–as with most weak markets, there are scary headlines out there: gloomy economic news here at home, combined with concerns that Europe’s current debt crisis is more widespread than initially feared. If you were among those many investors compulsively hitting “refresh” on your computer for market news on Thursday and Friday, I can hardly blame you.

One way–really the only way–to stay grounded at times like this is to concentrate your energies on your own portfolio and your own financial status. Changes may indeed be in order for your investment program, but you won’t know that without conducting some analysis. Your best first investment during turbulent markets is an investment of time. You want to invest in time to see where you stand now, and, if you determine changes are in order, thoroughly research your options.

Here’s your five-step checklist for times Read the rest of this entry »