Smart value investing

Many of the most successful investors, such as Warren Buffett, Tom Gayner and Seth Klarman, are value investors. They aim to buy stocks that are trading for less than they are worth. There’s more to it than that, of course, so here are some tips on how to be a good value investor.

First off, keep your emotions in check. Taking actions based on fear or greed often leads to subpar results. Fear keeps us away from good companies encountering temporary rough patches, while greed gets us into surging stocks that may be overvalued. Be skeptical of market darlings and stocks that are viewed as sure things. Look into what their risks are and weigh them against upsides.

Prepare to be a contrarian investor, looking for value in promising stocks and sectors that others are ignoring or avoiding. Out-of-favor stocks with beaten-down prices can offer attractive dividend yields, too. Following the crowd is likely to lead to average results at best.

Don’t avoid boring stocks. Companies specializing in insurance or paint or garbage collection can outperform companies in exciting and developing new industries. One of the best long-term performers has been Altria, the tobacco giant. (Being a value investor doesn’t mean you give up growth.)

Don’t be a speculator, grabbing shares of high-flying stocks that you know little about and not hanging on for very long. Instead, invest in great companies with the aim of holding for many years, understanding that you’re a part-owner in them. Get to know the companies well before investing and then keep up with their progress.

Pay attention to a company’s valuation. A stock’s price-to-earnings ratio is a good place to start. P/Es vary by industry, so don’t compare apples and oranges. Instead, compare peers, and also compare a company’s current P/E to its fiveyear average, to see whether it seems relatively undervalued or overvalued. Look beyond the P/E, too, as it doesn’t tell you everything.

Above all, keep reading and learning. The more you know, the better your investment results are likely to be.