Problems With The Value Investing Approach

There are several reasons why the value investing approach is not used by everyone.

Firstly, for long periods of time - possibly even a decade - the method is of limited value. For example, during the late 1990s, virtually every stock in every major market performed amazingly. If any company could vaguely prove that they were 'thinking about' an online strategy, they could command very high stock values. With hindsight, it all seems bizarre, but in the height of the frenzy it was a 'new business paradigm'.

Of course, any system of analysis needs to be carried out consistently so that when opportunities arise, they can be pounced upon. This can mean that an investor could potentially need to investigate companies for years and not actually make an investment.

Secondly, it is hard work. The value investing approach is one of accountancy and effort. This is not for the faint hearted! In addition, during the times of massive growth as described above, the work still needs to be done, even though it may yield no positive results.

This means that only very long term investors can really use the value investing approach. Partly because of the length of time that may be required to find a target, but also partly because once invested, an investor should probably hold for years to come. This means that an investor needs to have enough capital to not be forced to sell a holding for other reasons.

When a 'buy' signal does arrive, there is every chance that it will be at a time of recession. As such, if the recession is long, circumstances may become worse - and prices lower - before they get better.

It is worth pointing out that there are lots of people around the world using this method, trying to hunt out the bargains. This means that if and when a company falls squarely into the value investing approach, it's price will likely benefit from buying from value investors, meaning that it does not remain a bargain for long.

As you may imagine, an investor who follows and operates this method needs to have considerable strength of character! Waiting on the sidelines for years before proving your skill is not an easy trait to display...

Ultimately, value investment is a method of analysis that is very logical and rational and therefore rather seductive to potential investors. But the extreme dedication required to actually practice it makes it a method that is only really used by professionals - and a small group of professionals at that!

To read more about this investment 'religion', please visit the following pages:

What Is Value Investing?

What Are The Value Investing Basics?

The Value Investing Rules Of Ben Graham

The Good And Bad Of A Value Investing Strategy

What Is Asset Stripping?

Value Investing With Warren Buffett

Value Versus Growth Investing