How Value Investing Can Build Long-Term Wealth for Patient Investors
Published on by George Sparks in Wealth Management
Setting the right investment strategy to meet your goals is challenging for even the most seasoned investors – finding the right partner, understanding your risk tolerance, and developing a clear vision for your endgame all play into what works best for your specific needs. So how do you stay on track in times of economic volatility? Value investing can be a game-changer.
What is value investing?
Value investing is a strategic approach to uncovering underappreciated opportunities with the potential to yield good returns while balancing risk, and it’s particularly helpful during market changes and transitions. It prioritizes both publicly traded and privately held investments that seem to be undervalued relative to the market, focusing on analytical measures like the company’s intrinsic value and growth potential to determine value.
It’s as much an art as a science, especially as more companies’ value is tied to intangible assets, and it’s important to know that achieving optimal gains often takes time – so investor patience is critical to realizing the full benefits.
The fundamental difference between value investing and growth investing
The counterpoint of value investing is growth investing, which targets stocks that outperform others to provide potentially higher returns. Growth stocks tend to be more expensive and volatile with greater price fluctuations. High-growth companies usually see rapidly rising revenue and valuations as they expand quickly, and dividends are uncommon as high-growth companies prioritize growth over profitability. If growth stocks don’t meet performance or valuation expectations, the price can fall rapidly.
Growth mutual funds and value mutual funds contain both types of stocks and may be an option for certain investors. It’s just one way that the two approaches can overlap.
Other considerations for a value-based portfolio strategy
Advisors can curate a value-based investment strategy using investments with different liquidity criteria, from daily liquidity to no liquidity at all until an equity exit occurs. The investor’s income, growth, and liquidity needs factor into the spectrum of investments.
Due diligence can uncover unique investing opportunities. Typically, advisors use an internal vetting process that evaluates a company’s history, principles, investment strategy, and operations. These can often be uncovered with a thorough process that reveals some kind of edge, or key differentiator.
The edge may be a particular industry insight or a proven track record in a specific area, as examples. It’s a repeatable strategy with proven results. For investors, this can mean an underappreciated investment that can add value to their portfolio.
This kind of operational and investment due diligence provides investors with a confidence level that the company can execute a strategy repeatedly. The result is a solid risk-adjusted return with lower potential for problems down the road.
Get the value from value investing
As with any strategy that builds long-term wealth, diversification can help to reduce risk exposure, and balance is key. Always consult an experienced, credentialed financial adviser and tax planner to ensure the strategy meets short and long-term goals. Our experienced team of wealth management professionals is here to help. Contact us for a conversation.
If you’re interested in diving deeper into the value investing concept, here’s a 5-minute video that explains it in a little more detail, and another video covering real-world value investing success stories. You can also explore the advantages of having a CPA/PFS as your investment advisor in this 9-episode video series.