Step-By-Step Guides To Value Investing Strategy

Everyone has their own investment strategy that they feel comfortable with. I think I'm comfortable with value investing than other investing methods. The thing is my value investing style could be different than yours. So I'm here to share my steps in high-level how I approach value investing strategy

Step 1 - Identify a good business

A good business simply means it can consistently generate more cash. So these are the criteria for a good business in my opinion:

  • Consistent growth rate in revenue, net income, gross/net profit margin, and cash flow from operations
  • Positive feature earning growth rate for 1 to 5 years
  • Consistent competitive advantage
  • Consistent return on equity (ROE)
  • Conservative debt

One of the ways when I look at competitive advantage is compare it cross/net profit margins with the same industry. If it is higher, it has the competitive advantage.

For conservative debt, I look at the high current ratio, good debt serving ratio and low/negative net debt to equity ratio.

Step 2 - Identify the stock is undervalued or overvalued

The quickest way is using PEG ratio but it is probably not enough. I use discounted cash flow to calculate the current intrinsic value of a stock. If it is lower than the current price, the stock is undervalued and vice-versa.

Step 3 - Decide when to buy

This requires a bit of technical analysis skill.  I'm still learning and what I have been doing is buying at the dip. I usually buy on the following scenarios:

  • Pull back during up trend
  • Short term bad news sell off
I also break my investments to few parcels to buy instead of going all-in. 

Step 4 - Decide when to sell

I usually won't sell the stocks. In fact, I haven't sold any stock until now.  I think I will consider to sell only when there is enough capital appreciation (usually is more than few years) and the stock is currently overvalued. This also benefits for capital gain tax (GST) 50% discount.

For more details on my plan, see my previous post related to value investing using trend

Repeat step 1- step 4 on the next or the same stock. 


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