The basic tenet of value investing isn’t about picking up stocks at a low price.1 After all, shoppers at stores like Wal-Mart or Costco don’t just look for cheap goods, they want the same items they could buy from other retailers but at a lower price.
That’s what value is: quality at a low price.
When it comes to stocks, two of the criteria that are hallmarks of a value investment are quality and growth potential.2The value lies in future earnings, generally years away. We believe value investors would do well to consider their holdings not only as an investment, but also as a business in which they have partial ownership. One of the risk mitigation strategies is that the stock is purchased at a discount to its actual worth, with the goal that it will reach that worth sometime in the future. It’s important to make the distinction that a discount doesn’t necessarily equate to being cheap or of poor quality.3
Over the past nine years, growth stocks have outperformed value stocks, so many market analysts believe they are overdue for a rebound.4 Value securities are more likely to rise whenever the Fed makes its decision to increase interest rates. Such an event would signal both more robust economic growth and higher interest-rate margins for banks and other financial companies, offering the potential for a value resurgence.5
Today, there are hundreds of value investment opportunities in the market, some of which include individual stocks, mutual funds and exchange-traded funds.6 Value investing may appeal to investors who conduct their due diligence for quality issuers and are patient over the long term. They may not be as flashy as today’s growth stocks, but by the same token, “smart” consumers don’t exactly shop at Wal-Mart or Costco for the prestige. Before investing, you should consult a qualified financial professional.
1Vitaliy Katsenelson. CNN Money. July 7, 2016. “The Values of Value Investing” Accessed Aug. 3, 2016.
4Andrew Bary. Barrons. March 12, 2016. “Move Over, Facebook and Netflix: Value Investing Is Rebounding.” Accessed Aug. 3, 2016.
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