Ask any successful investor what he or she looks for in a profitable investment opportunity and they will more than respond along the lines of buy low sell high. It seems obvious, yet many investors do not stick to the basic principles of this common mantra.

In answering the question - "What is value investment strategy?" - we will provide you with a deeper insight into what you should be looking for as you learn to become a successful value investor.

Principles of value investing

It is true that the investment landscape is constantly in a state of transition as financial markets swing one way and then the other. As an investor your aim is to profit from these swings as opportunities arise.

It is precisely this ability to reward investors during up markets and down markets that makes the value philosophy a lower risk, higher reward investment strategy. Being in a situation where your investments generate long-term returns with reduced levels of risk is a position most rational investors would like to be.

How does Value differ from Growth?

Value investment strategy differs from other forms of strategy in the sense that assets are acquired at an undervalued price to their potential. Based on the understanding of the drivers and fundamentals of value assets, the value investor does not worry about short-term price movements. Detailed value driven analysis provides the value investor with the assurance that once the asset captures wider market attention, the price will increase through natural processes.

Compare a value strategy to the growth investment approach, which seeks to identify companies that have demonstrated the recent ability to present investors with above-average returns. Growth investors will look to capitalize on continued growth as the company's product or service progress towards and beyond the peak of its life cycle.

With this in mind, an investor committed to a growth strategy will be concerned about short-term economic fluctuations as negative news can quickly reduce consumer demand for a particular product or service.

The value of a sustainable competitive advantage

The value investor however is not concerned about such economic misfortune, as their assets have already factored in the inevitable downturn of market conditions. A value driven investment is typically held together by a sustainable competitive advantage that will not derail performance during uncertain times.

Whilst the growth investor will enjoy the returns provided by a company whose advantage is temporary, the returns are short lived. To maximize returns on each investment, the growth investor must determine the ideal time to sell the asset.

Holding onto the asset for too long could result in a sell-off as the price enters decline. Releasing the asset too early and the potential of returns falls short of its peak. Naturally, for the growth investor, price and timing are key elements to maximizing returns.

For the value investor, timing is a less important factor as value is determined by price and sustainable advantage. These two key factors are what makes value investment strategy a risk adjusted way to maximize long-term returns on your investment.

Identifying value investments

Whilst one value investment strategy may differ from investor to investor, the underlying principles of the philosophy remains the same. That is, to identify assets that are undervalued to their potential, in anticipation that the asset returns to its fair market value. The returns towards fair market value is where the value investor's gains are made. Identifying undervalued assets is a fine mixture of science, art, and patience.

  • Science
    Technical analysis during the asset selection process as you screen sector specific stocks to determine if any candidates conform to the value philosophy
  • Art
    Begin able to distinguish between a great company, a fair company, or a company in trouble. Understanding the importance of a competitive advantage and gauging how sustainable that advantage is. In this instance, assuming that the price is at least fair, the price of great companies is less important as the competitive advantage ensures a high level of performance for the foreseeable future.
  • Patience
    Acquiring assets at an undervalued price is sometimes a painstaking process. During periods where the wider market enjoys a bull run, capturing value is often difficult as most assets are firmly on the radar of institutions and fund manager.
    The best time to identify great companies that are available at a price undervalued to their potential is when the market retracts and investors selloff. In theory, if you have acquired your assets during times of market duress, you will be able to sit back and watch your assets increase as they grab the attention of the wider market during a period of price increases.
    In this instance, do not be frustrated with the lack of opportunity during period when the market is at its peak. This is the time to enjoy your gains. The real work begins once the market crashes, and it will inevitably crash as part of a cycle.

Final thoughts

Value investment strategy differs from other forms of investment as assets are acquired when they are either undervalued to their fair market price or they are supported by a sustainable competitive advantage.

Value investors use a process that combines art, science and patience to successfully work around market conditions in order to mitigate the risks involved in trading assets during bull markets. Acquiring value driven assets is best achieved as markets retract and assets valuations become more realistic in terms of risk.