The intricacies of investing and creating a proper asset allocation in today’s markets can be unsettling for most. While many companies sit at their 52-week high, investors are hesitant to buy in with the possibility of being the last one holding the bag if the market was to change directions. Whether you are in the camp that believes the markets are overvalued or the contrary, a prudent defensive strategy may be to have the proper offensive strategy -- value investing.
Many of the theories behind value investing were conceived around the time of the Great Depression by two Columbia University professors, namely Benjamin Graham and David Dodd. Warren Buffet, one of the most renowned investors of the present age and founder of Berkshire Hathaway, was a student of the two late professors. Graham had many rules he invested by, but two of his more famous rules were Rule No. 1 -- Do not lose money.
Rule No. 2 -- Do not forget rule No. 1.
Those rules are laughable for anyone who was invested in the markets during the most recent recession, but their reasoning behind the rules is deep rooted and market tested during the last 80 years. They believed true value investing was the purchase of stock or debt of a company who had a viable product or service, growing operational margins, little to no debt and was trading below its present or plausible future intrinsic value (or liquidation value). If the market-perceived valuation of the company went lower, they had the conviction to purchase even more.
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Value investment principles go back to the age old premise of “buy low, sell high.” Yet, buy low, sell high is subjective to an investment’s proper valuation. For most, picking individual companies based off Graham’s extensive valuation rule book is not something that can be put into practice overnight due to the strenuous research and study that would need to precede. For the time strapped investor, finding a value focused manager or fund to add to one’s portfolio as part of an overall allocation may be a prudent start. Pay keen attention to the positions the manager takes and try to understand the basis for the position. Value investing can help calm some of the stress of investing even more money into companies at a 52-week high.
For the lifetime student of investing, I highly recommend learning about Graham and reading some of his books. His value investment principles have proved priceless for many investors, i.e. Warren Buffet, and can be employed to not only the stock market but to numerous other investment industries.
Griffin Dalrymple, wealth manager with Opinicus Wealth Management in Bradenton, can be reached at (941) 896-9909 or griffin. firstname.lastname@example.org.