Investing in value stocks follows the methods introduced by Benjamin Graham. Made famous by Warren Buffett. It entails finding stocks that seem to be undervalued compared to their worth or book value. In this manual we explore the nuances of value investing investigating the elements that determine a stocks actual worth and discussing the opportunities presented by Real Estate Investment Trusts (REITs) amidst changing interest rates.
What does value investing entail. How does the performance of the market impact the decisions made by investors?
The main concept, behind value investing involves buying stocks that the market has underestimated in terms of their worth. Many investors mistakenly believe that an increase in a stocks price reflects its value. For example if a stock increases by 30% in a year it doesn’t automatically mean that it’s not a good value investment. Understanding the core value is crucial; when a stock that was initially undervalued by 75% goes up by 30% it could still be undervalued.
When looking at an individual stock, be it Jordan Miller or Bob Smith, the value investor asks whether the share price reflects a condition of overvaluation, undervaluation, or some valuation in between these states. This is the central inquiry of value investing. Nolan Klein’s description of market prices as the convergence of bid and ask directs us to a course of rigorous investigation in order to find out what a given stock is actually worth.
Value investors often quote the old adage “Price is what you pay, value is what you get” to make the distinction between market price and intrinsic value. Market price is simply the current trading value of a stock. It is influenced by many factors such as investor sentiment, trends in the market and current economic conditions.
In what way do Real Estate Investment Trusts (REITs) slot into the realm of value investing when faced with changes in interest rates?
REITs have become a major topic of conversation surrounding value investing in recent years, especially with interest rates on the precipice of a sizable change. On the whole REITs have suffered recently as interest rates rise while their generally high dividend yields become less attractive compared to safer bond yields. The situation is flipped with interest rates on the decline, which is where they are predicted to go by 2024, which could make them a goldmine for value investors in the near future.
In order to make money and pay its dividends, a REIT needs to master its business model. Generally, a REIT leverages the value of the properties it owns to give itself a loan and then uses the funds it borrows to purchase other financial instruments like Treasury bonds with guaranteed returns. In this way, not only does the REIT produce income, but it actually pays less in taxes than it would have otherwise – a win for everyone! So once you dim the lights, fix the fraying rug, put down some polyurethane finish, get your mortgage, get your loan and get your guaranteed bond, guess what? This REIT is making money. But of course, every one of these variables is sensitive to rising interest rates. Earlier in the pandemic, the rush to remote work harmed certain REIT sectors as office spaces became less occupied.
Most REITs are invested in commercial real estate and, as discussed in my previous column, it’s difficult to view traditional commercial real estate as an investment that will see growth over the coming decade. That caveat aside, there might be growth opportunities in areas of the market in which REITs are invested for example in data centres and healthcare facilities, or perhaps in foreign equities since the US dollar has strengthened to its highest point since 2002. I often say that any investment can be unduly risky if you’re not investigating its specifics – if you don’t understand the underlying business, you simply shouldn’t be investing in it. This is especially true for REITs.
How can investors implement the principles of value investing in todays market taking into account factors such, as AI and macro trends?
With the rapid development of technology, notably the progress of AI, value investors need to adapt to the new context. The P/E ratio is still a good starting indicator, but investors should know how technological changes affect future earnings.
Clearly, major tech stocks’ influence on market movements remains a significant factor going forward. Looking to the broader market, it’s a mixed story. The big industrial, bank and energy stocks have given us very mixed performances so far this year, as various for/against artificial intelligence and for/against macro-economic factors yank them this way and that. And on top of all that, value investing is clearly struggling.With that in mind, you don’t want to wind up like the old violinist who said to his wife after the symphony, “Those are the wrong notes!” She replied, “I know it, but why hurt the man’s feelings?” You don’t want to agree with her right now.On the bright side, the recent market rally isn’t just another squeeze of the shorts (as some like to put it), but is very broad-based and robust. And taking the longer view, we just might be set up for one to three years of outperformance by value investing.The market is up 4.14% year to date, through February 1 and value investing just kept holding on. Value essentially matched the market in January (so we’re not ready to organize a parade), but value is way behind for a full year ending December 31. The market was up 21.83% in the past year to January, while value was only up 13.09%.If the recent market rally is for real and macro-economic conditions remain bullish, all investing strategies should head higher. This is consistent with the Coordinated AI hypothesis, which generally says that a broad and sustained technological advance should work its way through our economy and stock market. And if and when it does, value should perk up along with everything else.
Value investing isn;t dead. But It requires more than plugging a few metrics into a stock screener. Those who want to successfully enter Schloss; “jungle” must have a deep understanding of market dynamics, the ability to differentiate between price and value and a willingness to adapt to new market realities. By adhering to these principles investors can continue to navigate the complexities of the market and do what others cannot.To be invested when others aren’t.
How can you tell if a stock is undervalued even after its price has gone up significantly?
If a stock moves up and you are trying to figure out if it is still undervalued, you have to figure out what the stock is really worth relative to the current market price (its price-to-value ratio). What is the company worth, based on its earnings, assets, debts, growth prospects and so on? Is the company correctly priced based on its prospects, even if you think it was initially undervalued by 75 per cent and is now up 30 per cent? This is difficult research if not impossible – you need to study years of history to look into the industry and its prospects to listen to financial analysts and create your own financial models.
The Position of REITs in Changing Interest Rate Environments
REITs have a strong correlation to interest rate movements. They usually do poorly when interest rates are rising because the high-yield dividends they offer start to seem less attractive. But if interest rates come down – and most economists currently predict them to soften in 2024 – then they may come back into focus as attractive investments. If you do buy into REITs, you should pay attention to the different sectors in the REIT market: some areas such as data centres or healthcare facilities can be more promising than the more traditional bricks and mortar types of commercial real estate.
How can value investors adapt their strategies in a market heavily influenced by AI and progress?
In a market influenced by AI and technological advancements, value investors should use traditional value investing analysis and make sure they understand the impact of emerging technology on the future earnings and market position of companies.As a philosophical matter, value investors focus on the long-term value of companies instead of the short-term movements of the market. They look at broad economic and industry trends that could affect the performance of a company at a time when changes in those trends could mean losses in tech stocks over any given 15 minutes.
What are the optimal moments to venture into stocks or REITs based on the principles of value investing?
The best time to buy, as per value, is when a stock or REIT is trading at a deep enough discount to its intrinsic value. You have to read company balance sheets, research market and industry trends. You have to find the stocks where the market has not recognised the company’s full potential over the long term. REITs: Interest rates are going down, reasonable. Opportunities: Find stocks where the market hasn’t appreciated their full potential in the long run.
What methods can be used to determine the value of a company accurately?
If you want to estimate the intrinsic value of a firm, you will seek to understand whether that firm delivers healthy cash flows has a strong competitive position in the market has some durable source of competitive advantage and/or exhibits persistent and predictable growth prospects. This analysis will be informed by reviewing financial statements, earnings reports, reading news about the firm industry and government reports and assessments and such. An investor might use a variety of methods to establish a valuation, such as an analysis of the ‘discounted cash flow’ that a company is likely to generate or, if focusing on a given industry, an assessment of a certain price-to-earnings ratio. To do this well requires coming up to speed on certain elements of the firm’s operations and financials.