Sometimes, it seems as if there are as many investing strategies as there are people telling you how to invest!
And of course, they let you know about how fast you can turn a thousand dollars into $57,275 if you just buy their investing system or newsletter.
But there’s really one way too long-term investing profits that have stood the test of time. Invest in good, profitable companies at a reasonable price.
Benjamin Graham is the father of what is known as value investing and Warren Buffett is a Benjamin Graham disciple.
Benjamin Graham wrote two best selling classics on value investing, ‘Security Analysis’ (published in 1934) and ‘The Intelligent Investor’ (published in 1946).
Value investing is simply buying good, growing, profitable companies for the long term by getting them at a reasonable price, or when they are undervalued by the market.
This is done through what is known as fundamental analysis of the companies financials. This includes such things as sales (and sales growth), earnings (profits), cash on hand, and the company’s book value as well as the price of the stock relative to those fundamentals.
This means things like the price to earnings ratio or PE. The price to earnings ratio is the price of the stock compared to the earnings of the company per share.
If the company earns $2 per share and the price of the stock is $30 then the price to earnings ratio is 15.
Keep in mind, this does not mean buying cheap stocks. Most cheap stocks are cheap for a reason so its best to either look for reviews or do your research. But sometimes, the stock of a company takes a hit because of a temporary obstacle or condition that pushes the stock price lower than its true value.
The concept of value investing is that, over time, these profitable companies will get noticed by ‘the market’ and the stock price will return to a more normal and justified value.
A very simplified way to look at value investing is buying a stock at a low price to earnings, or PE, ratio. In theory, the PE of a stock price should equal the profit growth of a company.
So if a company is growing profits (earnings) at 10% per year, its PE should be 10.
This is rare, as many factors come into play and many investors will pay for growth so fast-growing companies will be ‘expensive’ in terms of their PE.
A big player in an industry that is growing at 50% per year, will most likely command a PE higher than 50. Those are not the companies people like Graham or Buffet look for as value investors.
They want the quality companies that might be growing at 10% or 15% per year, that has a current PE less than that for a temporary reason that is not detrimental to the growth or stability of the company over the long term.
If you want more information on how to buy a stock for the long term, take a look at value investing and investors such as Benjamin Graham and Warren Buffet.