11 Free Value Investing Tips and Strategies to Excel in ASX 200 Stocks

Published on 26/09/2022

“If you are not willing to own a stock for 10 years, don’t even think of owning it for 10 mins” – Warren Buffet.

Value-investing is the time-tested formula for investing in stocks for the long term. A value investor invests for the long-term in stocks with sound fundamentals, promising products and services, excellent management, and growing market potential. Also, a value investor has a moderate to low-risk appetite because a value investor manages risks through diversification and learns to protect his capital. When it comes to creating wealth through stocks, it has been empirically observed that value investing is a highly successful investing strategy. Investing legends like Warren Buffet and Charlie Munger have built their enormous wealth over the year through value-investing.

Here, we will talk about the 11 most important value investing strategies and tips which would help you build wealth through investing in ASX 200 stocks. These strategies have been finalized based on decades of investment wisdom by legendary investors. Moreover, a study of the past performance of the individual stocks as well as the stock market in general validates these strategies.

Here, we go.  

Strategy 1:  Invest in what you know

Source: wolvesofinvesting.com

A value investor should never be confused by a large number of choices. As a value investor, you should first focus on the companies about which you already have some knowledge. For example, you may be driving cars of a particular company or visiting a particular supermarket, or buying personal care products from certain brands. Chances are that you already have some information regarding these companies. These should be your primary target companies for short-listing your investment portfolio.  

Your priority would be to select among businesses or companies which you already know. Next, you can research more and put more companies into your circle of knowledge. When you know the companies in which you invest, you will have more confidence in your investment and you will feel less stress and mental pressure regarding your investment.

Value investors like Warren Buffet are well-known for staying away from risky stocks such as technology stocks mainly because they do not understand those businesses very well. They would rather focus on so-called ‘boring stocks’ which have simple products and services which are easy to understand and analyze. So, depending on your knowledge, skills, and interest, you can select your preferred businesses that you know and understand well.

So, how many ASX 200 stocks do you know well?

Strategy 2. Always focus on the fundamentals of the business

Value investing is all about focusing on the intrinsic value of a business or a stock. Now, what is intrinsic value?

In simple words, intrinsic value or the fundamental value of a stock is the ‘true worth’ of a stock. This true worth of a stock is determined considering several factors, including:

  • nature of its business
  • the potential of its products and services
  • market share and growth opportunities of the business
  • quality of management
  • capital structure (how much debt the company has or how leveraged it is)
  • brand value (how well recognized the business is, is it a preferred brand?)
  • corporate governance in the company, etc.

The current market price of the stock may be different from its intrinsic value. However, in the long-term, the stock price settles around the intrinsic value. Therefore, you should always focus on the fundamentals of stock while deciding on your investment portfolio. Ask questions such as:

  • Will the products and services of the company have demand in the next five years or ten years?
  • Is the management of the company honest and ethical?
  • Does the company have too much debt compared to its assets?
  • Does the management have a strong vision of the company? How much equity do they own in the company? Are they buying or selling stocks of the company?

When the insiders are buying the stocks of the company, it reflects their confidence in the business and its future potential. This means the fundamentals of the business are strong and the stock is a good investment option.

Strategy 3. Hold some cash in hand and keep looking for opportunities

“A correction is a wonderful opportunity to buy your favorite companies at a bargain price.” – Peter Lynch

It is always advisable not to invest your entire investible funds in one go. Always hold some cash so that you can invest when there is the right opportunity. If you keep looking for opportunities, time and again you will get some stocks that are selling at a lower price compared to the fundamentals of the stock. You must have enough cash to benefit from such opportunities.

Source: themagichoroscope.com

Many investors lose investment opportunities because they have exhausted their funds by investing in one go. Don’t repeat this mistake and always be ready with some ‘powders dry’ to use at the right opportunity.

For example, suppose you have invested 100% of your investible funds in the market. Now, you hear that a financial company is about to launch a life-saving drug that has a large market size. It is common sense that the stock price will appreciate greatly and this is a very good investment option. However, since you do not have any funds left with you, you will either miss this opportunity or you will have to sell some of your investments (which may be in loss as well) to clear some funds for the new investment. Both ways are not desirable.

Therefore, ideally, you should hold 15-20% of your funds as read-cash for bargain hunting in the stock market. You never know when the next big opportunity presents itself.

Strategy 4. Wait for the right price to buy or sell

Every day the price of a stock fluctuates – it goes up some days and goes down some days. A value investor must be patient to wait for the right price. Now, what is the right price of a stock, and how to determine it?

How do you decide what price you want to pay for a kilogram of apples? How do you know that the seller is asking a price that is too high or too low?

Source: tavaga.com

Probably you have assigned a mental price for a kilogram of apple (depending on the utility of apples to you) and when the seller is asking a higher price you may be unwilling to pay. You must follow a similar strategy while buying or selling stocks.

The intrinsic price of the stock is the mental price that you decide for a stock. You must wait for the right price and when the market price is right for you, just take the opportunity. The right price is decided after carefully considering the points discussed in Strategy 2. Once you have the right price of the stock, don’t pay a higher price to buy it. Wait for the market to correct so that you can buy the stock at your own selected price.

1. Buy a stock when its market price is much lower than the intrinsic price.
2. Sell a stock when its market price is much higher than the intrinsic price.
3. Never pay a very high price for a stock just because it is a good stock.
4. Never buy a bad stock just because it is selling at a very low price.

Strategy 5. Diversify your risk – Never put all your eggs in a single basket

Diversification is an established tenet of conservative investment.” — Benjamin Graham

Have you observed some stocks fail to perform well or even decline even in a raging bull market? Also, we can often see some stocks going up even when the market is under a severe bear attack. This is because different stocks or even different industries perform differently under similar economic circumstances.

For example, during the COVID pandemic we observed that even when the broader market was falling severely, pharma and IT stocks were going up whereas financial stocks were most affected.

Source: retirementresearcher.com

This is because the pharma companies were set to be benefitted from all the healthcare spending during the pandemic and thereafter. Also, work-from-home and digital transactions made IT stocks lucrative.

On the other hand, banking and financial stocks were falling mainly because of concerns related to the overall economy, investments, and concerns for increasing bad loans and bankruptcies. So, as you can see, different stocks from different industries may perform in different ways during the same period. Therefore, a value investor would never invest all his funds in a single stock or a single industry. Rather, a value investor would carefully choose several stocks from different industries to create a balanced portfolio.

Diversification means investing in several stocks from different industries or domains so that the overall risk of your portfolio is managed. Ideally, a total of 10-20 stocks from 4-5 different industries can help you mitigate your risks and provide a stable return.

Different industries may perform differently depending on the economic situation. Sometimes, growth stocks like technology stocks may lead the market, and other times industries like real estate may perform better. Therefore, your portfolio should be diversified to mitigate risk.

Always have some defensive stocks from sectors like utilities, consumer goods, or pharma to have a well-balanced portfolio.

Strategy 6. Dollar cost averaging

This is a famous value investing strategy given by legendary author and investor Benjamin Graham in his classic book ‘The Intelligent Investor. This is a simple strategy in which one needs to invest a particular amount of money, for say $1,000, every month or every quarter on a particular date on a stock or several stocks. This strategy is followed every month or quarter no matter what is the price of the stock on that particular date.

For example, suppose you think Commonwealth Bank (ASX: CBA) is a good investment option for the long term. The stock is currently trading at around $63 and you want to invest $1,000 every month in the stock. So, no matter if the stock price is $55 or $70 a month, you need to buy as many stocks as you can with $1,000 for many years.

When this strategy is followed for many years, it can lead to a very high return in the long term. This is a passive investment strategy for investors who don’t have time or intention to spend too much time calculating the right time to buy or sell stocks.

Source: cfainstitute.org

The main benefit of dollar cost averaging is that you don't need to worry about waiting for the right price or time in the market. You can just invest a fixed sum every month for many years.

Strategy 7. Be mentally prepared for market fluctuations and even big declines

Every day, as soon as the stock market opens, stock prices start going up and down. As long as the stock market is operating, stock prices will continuously fluctuate. These are intra-day price fluctuations.

In addition, stock prices can have major movements in the weekly, monthly, or quarterly time frame. Moreover, once in a while there will be a major decline in stock prices. For example, during the 2008-09 global financial crisis or the recent COVID pandemic, stock indices declined by as much as 30-40%.

Source: pipsedge.com

Never forget that value investing is a long-term game. A value investor is concerned about short-term price fluctuations.

Even big declines to the extent of 30-40% cannot deviate a value investor from investment goals. These are merely noise for a value investor. Rather, your focus should be on buying quality stocks whenever there is a market decline and the market gives you a bargain.

Historically, it has been seen that big market declines bring a lot of purchase opportunities as even fundamentally excellent stocks are available at a throw-away price. The recent COVID-induced market decline shows how the market eventually recovered after a sharp fall and we are witnessing a spectacular bull phase since then.

Always remember that the main reason behind buying stock is that a fundamentally strong stock is available at a cheap price. Also, the main reason behind selling a stock is either that the fundamentals of the stock have deteriorated or the stock is trading at a much higher price than its intrinsic price.

Strategy 8. “Be fearful when others are optimistic and optimistic when others are fearful”

The above is a timeless investment tip given by legendary investor Warren Buffet. It has been often observed that during the bear phase of the market, many investors with low confidence level starts to exit the market, and at the peak of the bear market experience maximum exit.

However, the peak of the bear market is when the market is now about to make a turn and the bull phase is about to begin. Similarly, the peak of the bull phase experiences maximum new entrants when the market is dangerously overheated and overpriced.

Source: www.wsj.com

This happens because of the herd mentality of investors. One should do the opposite.

Stock investing is not similar to a democratic process in which the majority decides the pollical movement. In the stock market, the majority is often wrong. This is why when the majority of people are too excited and optimistic about the market, probably this is the right time to gradually exit the market.

On the other hand, when the majority of people are too pessimistic about the market, it also indicates that the market is about to turn to the other side and the bull phase is about to start. This is exactly what happened during the COVID-induced stock market crash. Many investors became overly pessimistic about the market and they exited at the market bottom. However, we have seen that the ASX 200 and other indices recovered sharply from the market bottom.

Smart money enters the market when there is too much pessimism in the market because they know the market cannot go down anymore. On the other hand, smart money tends to exit the market when there is too much excitement and the majority is bullish on the market.

When the majority is pessimistic about the market, the chances are that all the seller has already exited the market and the bull phase is about to begin.

When everyone is euphoric and extremely bullish about the market, chances are that most buyers have already invested and the market is overstretched. This is probably a time for the market correction.

Strategy 9. Avoid averaging down on a losing stock

Suppose, you are optimistic about stock and you buy the stock when it is trading at $25. Now, after a few days, you see that the stock price has declined to $23.75. Since you are very optimistic about the stock and its price has fallen, you are tempted to buy some more of the stock so that your average buying price falls.

Now, every subsequent price decline of the stock may induce you to buy more of it, and eventually, you will be trapped in the stock with a huge investment and declining price. This is called averaging down. It’s a big trap – recognize it and avoid it!

Rather what should you do?

When a stock is continuously falling, it is better to check its fundamentals (has anything changed about the company? Are insiders selling?) rather than keep putting more money into the same stock. Averaging down often leads to a huge loss in the stock market because many stocks never recover or their bear market sustains for a very long-time.

Source: vantagemarkets.com

Rather than averaging down, you should focus on diversifying risks and spread your investible funds in several different stocks (preferably from different industries) so that the downfall in one stock is compensated by price appreciation in other stocks. This will ensure that you earn healthy returns while protecting your capital and lowering your risk.

A good strategy is to average up – buying more quantity of the stocks which are going up and have great momentum.

Strategy 10. Reject the gambling attitude

“The basic story remains simple and never-ending. Stocks aren’t lottery tickets. There’s a company attached to every share.” – Peter Lynch.

Investing is different from gambling. A gambler relies on luck; whereas, an investor relies on his research, analysis, and judgment. Never, invest in the stock market with an attitude of a gambler. Stock investing is all about discipline, careful analysis of information, making sound judgments, and mitigating risks.

 

Source: investorjunkie.com

Investing in the stock market with an attitude of a gambler is a certain way to lose your capital. A gambler wants to get rich quickly and therefore bet a huge amount of money on high-risk games. However, ultimately all gamblers lose money in the medium to long-term and they end up incurring huge debt or completely eroding their wealth.

On the other hand, a value investor wants to build wealth slowly and steadily over the decade. A value investor manages risk and invests with sound judgment, analysis, study, and adequate research. Remember, that the most profitable investment strategies are often boring ones – buy good stocks and hold them for many years without the temptation of gambling or booking profit early.

In the stock market, we better remember the classic wisdom – ‘slow and steady, wins the race.

Strategy 11. The market is the supreme – don’t fight it – be an obedient student

Many traders and investors lose money in the stock market because of their inflexibility and their tendency to ‘fight the market’. So, what is ‘fighting the market’? One fights the market when one habitually commits the same mistakes again and again without learning from the market.

Source: https://thefrugalsamurai.com/

For example, suppose your personal view is that the market should be bearish because of recessionary concerns. However, if the actual market keeps going up and you keep taking the opposite strategy i.e., selling instead of buying (because your personal bias is bearish), it would be an example of fighting the market.

Fighting the market is like forcing the market to change course, which is not only impossible for a single investor but also financially suicidal. The market is like a gigantic ocean and one must learn from its moves rather than trying to tame it!

No matter how confident you are in your research, analysis, and judgment. Always respect the moves of the market. The market moves based on the wisdom of crowd and mass psychology. An individual investor is too small to fight the market moves!

The market is supreme and it already knows something that you don’t know. Therefore, make the market supreme and be an obedient student of the market.

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