What You Should Know About Value Investing During a Crisis
Are you looking for a new investment strategy amid the Coronavirus crisis? Value investing might just be the investment strategy for you.
Value investing is typically not favored by many investors as it can get complicated very quickly, but this strategy has also proven to provide huge returns, so it’s important to do the research and see if it’s the right move for your investing future.
After reading this article you should have a good understanding of what value investing is and how you can benefit from it.
In This Article:
What is Value Investing?
Value investing involves picking investments that are at a good value. Benjamin Graham is credited with coming up with the concept of value investing. He wrote a book on it called, “The Intelligent Investor.” Graham was the professor and mentor of American investment guru Warren Buffett, who is the best-known value investor today.
Someone who’s a value investor will look for undervalued stocks, bonds, and other investments.
An investment’s price should, in theory, reflect its potential future returns and the risk that the investments may not achieve those returns. As a value investor, it’s your goal to find investments that are trading below their fair value.
Value investing can be best described with the classic investing phrase, “buy low and sell high.” While buying low and selling high is what many investors aspire to achieve, it’s a lot harder to do in reality. As a value investor, you’ll rely on past performance and future forecasts to figure out how much a company is worth right now and how much it may be worth in the future. However, if your forecasts are wrong, a value investor has the potential to lose a lot.
Many things may cause a stock to be undervalued. For example, when a publically traded company reports lower than expected earnings, its stock price may take a hit due to investors selling the stock in reaction to the bad news. Despite the drop in stock price, this often doesn’t reflect a company’s future potential. By buying a stock at a lower share price today, you’re possibly getting better value for it in the future.
What Do Investors Think About Value Investing During a Crisis?
A financial crisis can be a tough time for investors. It can be difficult to watch the value of your investment portfolio swing wildly. In a crisis like we’re in with Coronavirus, the market tends to react to what is perceived as good and bad news, with wild swings in value. That can be a lot for an investor to stomach.
While stock prices may fluctuate on a daily basis, it’s important to keep in mind that the true value of a company changes quite slowly over time.
While the seriousness of Coronavirus shouldn’t be downplayed, for a lot of value investors it hasn’t changed the way they think about stocks. It’s a value investor’s widely held belief that one shouldn’t react based on news headlines; rather, it’s much better to take a long-term perspective.
When the stock market is down, value investors see this is an opportunity to buy high-quality, blue chip stocks on sale. A value investor might sell their overvalued growth stocks and buy stocks they see as undervalued. This is based on the belief that investors are more likely to overreact when the market plunges than when it’s flying high.
When Should You Consider Value Investing?
There’s no one right time to consider value investing. You can pretty much start value investing at any time. There are always undervalued stocks out there. It’s just about being able to identify them and conduct your due diligence on the company to understand and forecast your returns and risk. By choosing the right stocks, you’ll see the benefits in future years.
Value investing makes the most sense when you have money to invest for the long-term. If you’ll need the funds in the short-term, it’s probably not for you. It also depends on your risk tolerance. It’s all about being able to show patience by buying stocks that are undervalued and holding on to them for the years to come.
A crisis can be the opportune time to buy stocks. If you’re able to identify stocks that are undervalued, you can buy them at even more of a discount than usual and benefit when the stocks go up in value in the future.
Value Investing: Benefits and Drawbacks
Value investing has the potential to generate some handsome returns over the long run. During a crisis when stock values are down, it’s the perfect time to buy stocks that are undervalued. If you’ve chosen the stock correctly, you’ll reap the rewards over the years to come.
Albert Einstein once famously said that compound interest is the most powerful force in the universe. Through value investing you can harness the power of compounding by reinvesting your dividends and stock market returns. By doing that, over time you’ll be benefiting from interest earned on top of interest.
Value investing isn’t perfect. While a stock may appear to be undervalued during a crisis, there can still be further room for it to drop. Even if you do end up buying it on sale, you may not buy it at the very bottom and end up leaving money on the table. That mistiming can end up costing you.
Being a value investor takes a lot of patience. But sometimes that patience doesn’t pay off. During a crisis you can hold onto a value stock that you’re sure is going to bounce back, but sometimes for whatever reason, it doesn’t. Because of this, you could end up holding onto a stock that’s a dog in your portfolio for far too long and end up selling it at a loss, undoing all your hard work.
Who Should Consider Value Investing?
Value investing can make sense for Canadians with all levels of risk tolerances and time horizons.
If you’re someone older who’s nearing retirement or you’re already retired and your main goal is wealth preservation, value investing makes a lot of sense. By choosing large, profitable stocks that regularly pay dividends, you’re less likely to experience huge losses during a crisis and you might actually outperform the market if you did a good job picking the stocks that are below value.
Value investing isn’t just for seniors. Being a value investor can benefit pretty much anyone with a well-diversified portfolio. When your portfolio has both value and growth stocks in it, it can help you uncover the winning stocks, while being able to withstand a bear market (a market that is experiencing long periods of declines).
As a younger investor, there are lots of investment strategies out there, and you’ll probably want to choose mostly growth stock. Despite that, value investing can still be an effective way to beat markets in the long term.
Where Can I Find Value Investing Opportunities?
Are you looking for good value investing opportunities? Here are our recommendations for Canada’s top online brokers where you can easily find them:
Questrade is an online brokerage with low fees. It’s ideal for those who know what they’re doing (i.e. you don’t require a lot of customer service support). Once you get the hang of things, buying and selling stocks through Questrade won’t take too much time. The most time consuming part will be figuring out the value stocks to buy and sell.
If you want to save money on fees and you don’t mind trading from your mobile phone, Wealthsimple Trade might just be for you. Wealthsimple Trade offers a huge selection of Canadian and U.S. stocks and ETFs and no other company lets investors buy and sell stocks and ETFs for free. Why not give Wealthsimple Trade a try? All you need is a smartphone; there’s no paperwork and no confusing jargon. Better yet, there’s no minimum deposit so you can start with as little as $1, making it ideal for newbie value investors just starting out. Skeptical? Don’t be. Wealthsimple Trade makes money via its currency exchange fee for USD trades. The company only charges + 1.5%, whereas most brokerages charge around 2% on top of the corporate rate for currency conversion.
*And Wealthsimple Trade is now making it even easier to trade by offering a bonus: Get a $25 cash bonus and trade for free if you open an account, deposit $100 and trade $100.
Alternatives to Value Investing
If value investing isn’t your cup of tea, you can try other investing strategies. Instead of focusing on a few value stocks, you could spread your money across the markets in an effort to track the market. Although the market will have ebbs and flows, it does go up over time. Is there a guarantee this will continue? No, but if you don’t need these funds anytime soon, this can be a way to ride out the markets and benefit from its long term returns.
If you’re looking to track the market, you might consider lower cost options like index funds and exchange traded funds. Index funds and exchange traded funds are similar to mutual funds, but without the high fees.
The Final Word
Value investing isn’t for everyone, but it can make sense for a lot of Canadians. As long as you’re dedicated to taking the time to do the research and show patience, value investing might just be the right investment strategy for you.