What Are 12 Rules For Value Investing?

Value investing is a type of investment strategy where investors pick stocks they think are trading for less than their intrinsic or book value. Basically, value investing relates to investment of those stocks that an investor thinks are underappreciated.Let us understand the 12 key rules of value investing.

1) Objective

An investor must always note down their financial goals and keep their purpose of investment in mind.

2) Historical Performance

An investor must take into consideration the historical performance of both the stock they are interested in and the market. But even then, the decision to invest must not rely solely on past performance as circumstances can change over a period of time.

3) Earnings Per Share (EPS)

One can look for stocks that has an EPS that is twice that of the government 10-year bond rate.

4) Price to Earnings Ratio

The PE ratio of a stock is the ratio of the stock price to the earnings. It helps the investor know whether the earnings of the company have been incorporated into the stock price. A P/E ratio that is 40% of the highest ratio in the last5 years is considered ideal.

5) Dividend Yield

The dividend yield must be about 2/3rds of that of a 10-year government bond.

6) Free Cash Flow (FCF)

The Free Cash Flow is the amount of money left with a company after deducting all expenses from the revenue generated. It gives a good idea about the future prospects of a company since a good FCF means the company can invest more and show better growth.

7) Margin of Safety

Value investing does have an element of risk, so it is essential to have a margin for safety.This ensures that investors don’t incur huge losses if the stock goes wayward. Investors can keep a safety margin of 2/3rd of the intrinsic value of the stock . And invest only if the stock’s current value is lesser than 1/3rd of the intrinsic value.

8) Peer comparison

Value investment requires comparison of the stock with industry peers. Usually, this is done by comparing relative ratio analysis and comparisons with industry benchmarks.

9) Diversification

Value investors must never put all their eggs in the same basket. They must diversify their portfolio and not invest all their funds in the same stock.

10) Knowledge

Expert value investors recommend that you must have in-depth knowledge of the businesses that you’re investing in. However, there must be a line drawn in this regard to avoid insider trading, which is a criminal offence.

11) Long-term trading

Value investors insist that you must invest for a longer term. Of course, it depends on the investor what they think of as long term. For some it may be 5 years while for others it may be 10 years.

12) Invest in blue-chip companies

Value investors advise that blue-chip companies are the ones that are most undervalued and one must invest in such companies.

If you’re looking to enter value investing then the above value investing rules are a great starting point. Though you have to remember that these rules are in no way set in stone and you can modify them to suit your needs and goals.

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.