Recently we looked at basic investment principles for the foundation of portfolio management. Now I want to go further and explore value strategies for portfolio management.
Value strategies provide several important benefits. First they reduce portfolio volatility that kills performance. If you don’t have a clear understanding of how destructive volatility is to your returns; learn now!
Value strategies, done properly, have a real life proven record of above average returns with reduced risk. Famous investors such as Warren Buffett and Benjamin Graham have taught and implemented value strategies that work. Here are some of my favorite:
Value Strategies that Work!
Long Term Value Investing
In our fast paced world with internet trading and instant gratification, many investors look for quick returns through schemes and strategies that carry undue risk. Graham and Buffet taught the virtue of patience and the willingness to hold stocks for long periods of time until their value is recognized.
Take Advantage of Mispriced Markets
Graham used the parable of Mr. Market to illustrate how to take advantage of emotional markets that are frequently priced below or above their real value. The intelligent investor has done his homework and knows what he believes is the fundamental or intrinsic value of an investment.
A tactical asset allocation strategy provides the flexibility to take advantage of Mr. Market by being less aggressive (i.e. hold more cash) when asset prices are expensive, and more aggressive when asset prices are selling substantially below their intrinsic value.
Buy with a Margin of Safety
The margin of safety is the difference between the intrinsic value and the price an investor is willing to pay. The larger the difference the larger the margin of safety. Warren Buffett says “Price is what you pay. Value is what you get.”
Buy purchasing investment assets at a deep discount you reduce the risk of owning that asset. Negative surprises may have less impact on an asset that is already priced low. But there is also more upside as the real value is recognized by the market as time passes.
Stick to Quality Investments
Graham and Buffet have been believers in quality investing. It’s one thing to find a stock selling at a low price, it’s another to find a quality stock selling at a low price. You want to avoid purchasing value traps, which are stocks that appear to be bargains but are not really selling below their intrinsic value.
Value and Portfolio Management
Using value strategies means price matters. You may want to explore a couple of my favorite valuation tools for the market: