Value Investing Basics for Beginners

First off, what is the definition of value investing? Value investing is an investment strategy or approach where the investor buys a stock that is selling below the company's true value, or underpriced. Value investors buy discounted stocks with the belief that the price will reflect the company's true value in the future. Value investing goes against the herd that chases the hottest, fastest rising stocks of the moment for a longer-term ride of returns.

The most famous value investor (and richest person) in the world is Warren Buffett, who has generated over 20% average annual returns since the 1970's. He has prided himself on finding "good deals" on good businesses. This stock investing strategy was mostly created by one of Buffett's teachers, Benjamin Graham. He wrote a book on value investing called The Intelligent Investor. This 600+ page book, much like a textbook, gets into the nitty gritty details of his investing strategy and how he came up with it.

Basics of Value Investing

1. Find a Great Company- Whether it's a company you buy products from, buys products from you, employs you, or if you just love the company, check it out. Also, if it's in an industry that you know very well than you should look into it. You want to love the company you are going to own. It has to be GREAT, not just good or okay.

2. Proven Business- How long has this company been around? It's hard to value a company when it has only been in business for a year. Usually a company that has been successfully in business for 10 or 15+ years makes a good candidate. The companies must be proven, successful businesses to be considered for investment.

3. Survivability- Ask yourself, "Will this company be around in 10, 20, 30 years?" If you cannot see the company being around in ten years, you have no business investing in their stocks; after all, you are buying a piece of that company. Say you and three of your friends want to buy a new $1200 HD-TV. Would you want to pay $400 for your stake if you thought the TV was going to die in two years? I hope not.

4. Uniqueness- What is unique about this company? Do they have some kind of competitive advantage? Are they better at some aspect of the business versus the industry? Are they the first in a market? Do they have any special patents, copyrights, or trademarks? These are the kinds of questions to answer when finding out about a company.

This article should give you something to work on for a little bit. Stock investing can be confusing and difficult. Just slow down and think of some really great companies that you'd be willing to OWN not just hold the stocks of. Remember, value investing is all about finding good, solid companies that are priced below their true value.

Stay tuned for Part II because I will be posting more on Value Investing Basics. Congratulations! You now know the groundwork that value investing in stocks is all about. Making you a better, more informed investor is my goal.