The Good And Bad Of A Value Investing Strategy

There are some serious 'pros and cons' of a value investing strategy.

For example, the concept of 'buy low, sell high' will always be appealing, but the work and effort involved will naturally put off large numbers of potential investors. Of course, this also applies to other successful areas of stock investment such as technical analysis and selecting growth companies.

However, the very nature of the business cycle means that sooner or later, growth will become recession and boom will become bust. This means that bargains will sooner or later be available and at that point, the value investing strategy will become of use.

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The rules are rather inflexible and this can remove much of the mental anguish suffered by most other investors. The approach removes much of the emotion of investment.

There are other issues though. As a method of selection it is very mechanical and as such is not designed for building a balanced portfolio. It may be that one sector falls in price substantially and this offers potential purchases. However, an investor might then find that he or she owns a very concentrated portfolio of shares focusing just on housebuilders, auto retailers or some other sector.

It can also lead to premature buy signals. These might show that a company has fallen far enough to be of interest, but not that the price still has further to fall. This would provide some very scary times for any investor. It would take massive strength of character to purchase more of a holding that was already showing a massive loss - no matter how right the signal and price may be!

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A value investing strategy requires the investor to go 'against the crowd' for much of the time and to buy when others are in the midst of a panic. To quote an old investment saying, a value investor would be buying when there is 'blood in the streets'. This requirement to be doing the opposite of the market and most investors is by itself, a difficult task.

But worse than simply having to buy when others are selling, a serious value investor should not be buying when the market is booming. Worse still, to know when the time is right to purchase, he or she still needs to be watching and monitoring the market. In other words, sitting on the sidelines waiting whilst the rest of the world is trying to get rich!

This mental toughness is rare for any individual and is possibly one of the main reasons that there is only one Warren Buffett. Being famous for doing the opposite to the rest of the investment world cannot be easy!

For more information on this subject, please see these pages:

Value Investing

Value Investing Basics

Value Investing Approach

The Value Investing Rules Of Ben Graham

Asset Stripping

Value Investing With Warren Buffett

Value Versus Growth Investing

Value Investing Latest News

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