5 Secrets of Value Investing

1. Buy When Wall Street Won?t ? The big players on Wall Street are very short-term focused. They?ll often dump stocks just for missing one earnings estimate. But value investors favor a longer-term view. We can find hidden value in stocks that may be down as much as 30%, based on small news items and diligent research.
2. Own Companies, Not Stocks ? Don?t buy ?stocks.? Instead, become a business owner of companies with strong competitive advantages. Buffett looks for companies with solid financial performance managed by seasoned and savvy executives.
3. Beware of the ?Value Trap? ?Don?t be fooled by judging stocks on price alone. Just because a former high-flying stock is selling for half-price doesn?t mean it?s a good value. The stock may have much farther to fall and may never recover. Without knowing its intrinsic value, or possible catalysts for turnaround, you can?t know if a low price is a good value or not.
4. Know the True Value ?Price is what you pay, value is what you get. Cash flow is the real health of the business. As Buffett says, ?Intrinsic value can be defined simply: It is the discounted value of the cash that can be taken out of a business during its remaining life.? Discounted Cash Flow (DCF) is a powerful tool to help you know whether to buy, hold, or sell. (We offer our subscribers a unique DCF calculator on our website that makes this simple to do.)
5. Don?t Overpay for Growth ? It?s not true that value stocks can?t be growth stocks. Growth is a component of value. It?s just that value investors don?t rely on growth. Value investors minimize risk by looking at the worst case first. They choose investments with a built-in margin of safety. That?s why value stocks are the best way to follow Warren Buffett?s famous rules: Rule No. 1: Never lose money. Rule No. 2: Never forget rule No. 1.