Sunday, January 14, 2007

Value Investing ( Using Fundamental Analysis)


Value investing claims that the market sometimes undervalues a stock's true worthbaesd on the financial information which is available to the market.

The theory revolves around the fact that the market is slow to react to news or a changing market condition, but in time it will eventually assign a value that accurately prices a security. It may even be that the market has overreacted to some news pushing the share to an undervalued price.

A value investor looks for a stock that is trading at or below what it really is worth.

The two schools of Thought

There are two distinct ways that a value investor determines if a stock is trading at a bargain price:

1 .One way is to compare the stock (or industry) with other stocks (industries).

Usually the markets run in cycles. If everyone is currently buying resource stocks, perhaps they are selling bank stocks. Bank stocks might be sold off more than what they should have, which could result in giving the savvy investor an opportunity to find a good value in a stock (within a sector) that is currently unloved.

2. The other way a value investor might spot value is to know something about the company that they don't feel is factored into the price.

For example a company might be coming out with a new "Miracle Product." ( For example the I-Pod for Apple.) or assets on the balance sheet may be undervalued. This occured in Bunnings Wharehouse Property Trust (ASX:BWP) a few years ago in regard to the value of buildings.

The biggest criticism of value investing is that it often times doesn't provide instant gratification. this is why most people turn to trading instead of fundamental analysis. Many investors want to see their stock double within weeks of buying it. Value investors often have to wait for a lot longer than that but not always. What is gratifying to a value investor is that their investment usually get triple digit returns.

Good Luck investing.

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