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What Is a Value Investor?

You might be a value investor even if you don’t realize it. In fact, most people are value investors. Here’s why, along with the proof.

value-investor

In 1997, PBS started airing a television series called “Antiques Roadshow.” It’s still on, and over 6 million people watch it every week. If you haven’t seen it, the basic premise is this: Professional antique appraisers travel around the country hosting large events where people can bring in their collectibles or family heirlooms to learn how much they are worth. As you can imagine, some items are complete duds. (Sorry. That’s a nice lamp, but Target sells the same one for $19.95.) Some do have monetary value, but they carry much more value as sentimental objects. And then there are those occasional surprises. There are the two M.C. Escher prints, bought directly from Escher for about $60, that are now worth $100,000. There is the 1820s-era neoclassical desk worth $20,000 that someone paid $750 for.

That’s all very interesting, and it really is a fascinating show. But what stands out to me is that “Antiques Roadshow” gives credence to the fact that each one of us is a value investor at heart. Think about it. Who doesn’t love finding that mint condition Babe Ruth rookie card that no one else noticed? Or more to the point, I’d be willing to bet that any of us wish we would have bought 500 shares in Coca-Cola (KO) in 1980 when it was trading at 65 cents a share.

Of course, it’s not quite that simple to be a value investor. You can’t look to the future and find out which companies are going to skyrocket in price. Or can you?

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How to Get Started As a Value Investor

A value investor looks for stocks that are in the cellar and represent big bargains in terms of the ratio of their stock price to their annual earnings (the famous P/E ratio you’ve probably heard about). They buy value stocks at a discount to the actual value of the company and hold them for as long as it takes to achieve their fair value. This can take as long as a year or two (or more), but a value investor is happy to be patient in exchange for low volatility. Warren Buffett is perhaps the most well-known value investor.

There are two categories of stocks we are likely to encounter as we search for these undervalued stocks: 1) cheap stocks with visible growth prospects and 2) cheap stocks with invisible growth prospects.

Cheap stocks with visible growth prospects are often hard to find in a bull market but can be found in abundance in a bear market.

Cheap stocks with invisible growth prospects can be found both in bearish and bullish markets, but this analysis is more helpful in a bullish market.

So if you want to invest like Warren Buffett and find these undervalued stocks (both with visible and invisible growth prospects), use these seven value investing guidelines to get started in the right direction.

  1. Buy companies at bargain prices.
  2. Be patient.
  3. Go against conventional wisdom.
  4. Stick with what you know.
  5. Be self-confident.
  6. Buy companies with competitive advantages.
  7. Believe in America.

Warren Buffett has faith in the long-term prosperity of U.S. companies. This allows him to make investment decisions that are not based on where we are in economic cycles.

Do you consider yourself a value investor? What are some of your favorite characteristics of value stocks?

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*This post is periodically updated to reflect market conditions.