Skip to main content

Why value investing could be the riskiest investment strategy


For many years, value investing has grown to become a very popular and profitable investment strategy. Among those who consider value investing as a viable choice are Benjamin Graham and Warren Buffett – two of the most successful value investors with spectacular gains over a long period of time.

The expected returns from value investing are comparatively high, although the risks are oftentimes much higher than most investors can handle. This is because value investing can result in an investor being subject to value traps, which occurs when a stock’s price is low for a very valid reason. What are value traps?

Value traps

Surprisingly, value traps are more common than most investors realize. In spite of global share prices having increased from the beginning of the year, many other shares will still actively trade at significantly low prices in comparison to the broader index.

Although some might catch up and recover, others will not. Nevertheless, low-priced shares commonly appeal to value investors since the capital gain potentials are attractive. In short, for a good number of conservative investors, value investing may provide a high-risk option which could bring a substantial loss.

Beyond prices

Value traps may indeed provide a trading risk for value investors who do not realize that “value” goes beyond merely having a low share price. According to Warren Buffett, “It is better to buy a great company at a fair price than to buy a fair company at a great price.” Ultimately, the viability of a company must be measured along with its share value.

Hence, if a firm’s shares are selling at a lower price than their net asset value, a potential risk in the future might keep them from recovering the valuation deficit. Likewise, a stock which is valued according to the wider index may in reality provide significant value for money if there is a positive expectation of a rapid increase in returns over a medium-range period. In short, value investing can be a great strategy when you consider certain essential factors, such as price, prior to acquiring the shares of a company.

Periodic changes

Obviously, with rising stock prices, value investing loses its appeal. As investors all over are buying, value investors are selling and choosing to invest in other assets, such as cash. Conversely, when market prices are down, value investors will be buying stocks instead of selling them, contrary to the overall market consensus.

Being a value investor then can be a challenging occupation; and, on the short-term basis, it is quite easy to suffer paper losses as past trends continue to prevail. However, on the long-term basis, it has proven to be a viable strategy for investors of a certain level of experience and capability. It is not totally risk-free. So, by not merely focusing on price, this approach can serve as a highly-dependable road to financial success in the long run.

Popular posts from this blog

10 Habits to Develop for Financial Stability and Success

Just like any goal, getting your finances stable and becoming financially successful requires the development of good financial habits. I’ve been researching this topic extensively in the last few years in my quest to eliminate debt, increase my savings and increase financial security for my family. I’ll talk more about these habits individually, but wanted to list them in a summary (I know, but I’m a compulsive list-maker). Here they are, in no particular order: 1. Make savings automagical This should be your top priority, especially if you don’t have a solid emergency fund yet. Make it the first bill you pay each payday, by having a set amount automatically transferred from your checking account to your savings (try an online savings account). Don’t even think about this transaction — just make sure it happens, each and every payday. 2. Control your impulse spending The biggest problem for many of us. Impulse spending, on eating out and shopping and...

Making Thousands through IRA Investing Tips

For beginners as well as veterans in IRA investing, here are a few important things to consider. Newbie investors obviously need education in fundamental matters while long-time investors can always benefit from new ways to enhance their investment strategy .  So, how do you maximize returns from your IRA? Choose what fits your goals: Traditional or. Roth Should you go for traditional or for Roth IRA? While your traditional IRA contributions can be classified as tax-deductible, Roths use after-tax money; however, they provide tax-free withdrawals when you reach retirement age. To know more about either type of IRA, visit informative investment websites . Here are a few valuable tips on which to choose: When you should choose a traditional IRA: · If you are within a higher tax bracket now, in contrast to your expected level when you reach retirement · If a tax break now is more preferable to you than tax savings when you retire · If you...

Bellmore Group Management Services, Tokyo Japan on Mutual Funds

The Popularity of Mutual Funds Mutual funds are common investments because they provide a cost-effective and effective means to vary your investments (or possess an assortment of securities -- stocks, bonds, etc.) without having to make a huge starting investment. Basics about Investing in Mutual Funds Buying shares of a mutual fund allows you to pool your money with other investors and letting the mutual fund (which is essentially a professional capital management firm ) invest and administer the money to aid in achieving the fund's targeted financial objective (e.g., income, growth, or a mixture of both). This allows you to fast-track the setting up of a multi-faceted portfolio with as little investment as possible. When to consider Investing in Mutual Funds Since they are efficiently administered by experts and because they provide variety with essentially low starting cash input, mutual funds can be a viable option for the majority of investors. Many investors opt to invest i...