This article on the best investing strategy for long-term deep value investors was written by Jialin Chua. Jialin is a corporate finance and capital markets consultant in Singapore. She strongly believes in the mantra "price is what you pay, value is what you get," and is always on the lookout for cheap stocks. Her focus is on applying a net net and Acquirer’s Multiple strategy in her personal account. Article image (Creative Commons) by
What is your investing strategy? How do you select the right deep value investing strategy for long-term success? How long do you need to execute this strategy?
These questions should be foremost in your mind when starting an investment journey. To answer them, you really need to seek out reputable sources to read up on countless investment strategies and critically analyze the available options. Only then should you decide which fits your personality and goals best.
Investing Strategies: What Most People Do
Some might end up putting these first steps off and never investing at all as they are unable to settle on a particular strategy, forming paralysis by analysis. Others may finally decide on a strategy, only to eventually abandon it later on as it did not produce instant results. This is especially so after they discover some hot new trend heavily advertised with enticing investment returns achieved in the shortest time, falling prey to such distractions.
Most people would extrapolate such trends into the future. They expect a lucky winning streak to continue well into the future, and likewise, anticipate the opposite when encountering a negative streak. Hence, an underperforming company will continue to underperform into the distant future. Predominantly for investors who are new to investing, they have the tendency to believe that there is a foolproof investing strategy that they can follow that guarantees success.
These flavors of the month tempt new investors since “nobody wants to get rich slow,” and they promise amazing returns every year. Putting this into another context, an investing strategy is similar to picking out clothes. Instead of finding clothes that feel comfortable and can withstand wear and tear, new investors select expensive and fashionable apparels to be the talk of the town. This causes capital impairment since they are not consistent with their investment strategy, especially if they set long-term investment objectives — approximately ten years or more. Portfolios with longer investment time horizons can reduce the risk of loss. Investing strategy switching, even if it is only wrong a few times, destroys performance.
The irony lies in that even though nobody wants to get rich slow, most investors do not manage to amass half as much wealth with get-rich-quick strategies. There is not a single investing strategy that works well continually — and the crashes can be sudden and dramatic. Technology stocks that worked well during the 1990s did poorly in the early 2000s, causing the dot-com bubble. The frenzied housing market was the idiot-proof investing strategy in the United States before the 2008 financial crisis brought it crashing down. Gold was a solid and guaranteed investment choice until it lost one-third of its value. The massive gains of Chinese stocks and Bitcoin were great — until the inevitable collapses.
Your Best Investing Strategy: Deep Value
No infallible system for stock selection exists. However, this does not mean you cannot achieve wealth creation through the stock market. Other than considering the theoretical aspects of an investing strategy, you need to consider your personality, time frame, risk tolerance, and the amount of time that you want to dedicate to picking stocks. It is just better to stick to a time-tested investing strategy, such as deep value investing, that works and stacks the odds in your favor instead of chasing future growth and future stock returns, predicting the performance of a company over the next few years.
Deep value investing is the practice of buying investments for extremely cheap prices relative to conservative fundamentals valuation frameworks. The market tends to overreact to both good and bad news, resulting in stock price movements that do not correspond with the long-term fundamentals of the company. The key is to identify undervalued stocks with a large margin of safety between value and price to protect the downside. What is the rationale behind this? When a company is so deeply undervalued — even by long-term historical measures — there is a limit on the amount of money you can potentially lose, while at the same time increases the likelihood of getting a sizable return.
Inexpensive stocks are usually the most distressed companies with the weakest financials and failing business strategies. You’ll find that they are losing money, operating in failing industries, or being run by incompetent management teams. Usually, when a company trades well below its liquidation value, the market welcomes any change in its situation. The stock price eventually reflects the real values of these companies after a certain holding period, typically several years.
Deep Value: Time-Tested Investing Strategy
Hence, your best strategy is to understand what makes certain investment strategies work and what not to do, adhering to the time-tested basics of finding underlying valued stocks. Most importantly, you have to possess a long-term vision to stay invested with deep value investing strategy. Deep value investing is an enduring investment strategy that is unlikely to go away and has consistently worked over long periods of time. Deep value has outperformed the general market for over 70 years since Ben Graham and David Dodd published Security Analysis.
Stick to What Works: Patience Is Key to Success
As Warren Buffett once said, “The stock market is a device for transferring money from the impatient to the patient.” Being patient is vital to successful investing, as it is a prerequisite throughout the different stages of an investing cycle. You need to have the patience to do your research on a stock before you buy. You need to have the patience to wait for the right time to buy. And, finally, you need to have the patience to wait for the value to be realized. Good things come to those who wait.
A deep value stock usually finds itself in a difficult situation, which may take time for the company to fix its problems and eventually turn itself around. For deep value stocks, don’t have unrealistic expectations that a company will recover immediately, but know that when it does, its market price eventually will reflect its inherent value — and this will lead to immense returns.
You can then close your position, reap the rewards — and move on to your next deep value idea. Stick to the battered, boring and unsexy stocks found through deep value investing strategy, and over time, you will accumulate fantastic wealth.
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