Value Stock Investing is a vital strategy that can generate strong profits. With Value Stock Investing, you’re looking for bargains—under-valued stocks ignored by the stock market that have strong Fundamentals. When the market realizes its mistake and the stock turns around, it has more room to run and generate some great earnings for you.
If you want to learn about Value Stock Investing, there is no better place to start than with three giants: John Templeton, Warren Buffett, and Peter Lynch. They taught me many of the investment strategies I use and teach today.
John Templeton/Templeton Growth Fund
The seniorstatesman of my three giants was American-born British stock investor John Templeton. “Bull markets are born on pessimism,” he declared, they“grow on skepticism, mature on optimism, and die on euphoria.”
With most American investors focused on U.S. companies, I learned to look beyond them, and even beyond the American stock market, because of John Templeton. In an era of isolationist xenophobia, he was a pioneer of globally-diversified mutual funds. His search for bargain investments encompassed the world.
John Templeton paid attention to the high emotion of the stock market. The first half of his philosophy was “The time of maximum pessimism is the best time to buy.”When everyone else was selling, he bought low during the Depression and in 1939 at the onset of World War II . . . and he made millions.
The second half of his philosophy was “the time of maximum optimism is the best time to sell.” He sold high during the Dot.com boom when everyone else was still buying and made many more millions. Founded in the 1950s, his Templeton Growth Fund averaged 13.8% annual returns between 1954 and 2004, consistently beating the S&P 500.
Warren Buffett/Berkshire Hathaway
Forbes magazine calls Buffett“the most successful investor ever.”Warren Buffett calls most investors “lemmings,” because theydo what everybody else is doing.
Like Templeton, Buffett taught me the value of being a contrarian investor. His philosophy? “We simply attempt to be fearful when others are greedy, and to be greedy only when others are fearful.”
Buffett conducts a Fundamental Analysis to find seriously under-valued companies with consistently good ROE, small debt (low debt/equity ratio), and a high and consistently growing profit margin. He only looks at companies that have been established for ten years or longer, a product or service that sets it apart from its peers (it must have a competitive advantage), and he prefers companies whose product or service does not depend entirely on a commodity such as oil.
He claims that he doesn’t really care what the stock market does. All he cares about is a company’s overall potential as a business: is it a good long-term investment that will generate strong earnings?
Buffett is a master of determining a company’s Intrinsic Value. He wants companies whose Intrinsic Value is at least 25% higher than theirmarket cap. When he finds a company that meets that benchmark, along with the rest of his Value criteria, he considers that company a good investment.
Peter Lynch/Fidelity Magellan Fund
Called by Forbes magazine “the best mutual fund manager ever,” Peter Lynch built Fidelity Magellan from $14 million to $18 billion over 13 years. He beat the S&P 500 in 11 of those years with an annual average return of 29% ($1 became at least $27 under his management).
How did he do it? Primarily by compulsively conducting in-depth Fundamental Analysis 24/7. He says that “Investing without research is like playing stud poker and never looking at the cards.”
In his book One Up On Wall Street, he explained one tool he used to find bargain stocks: “A quick way to tell if a stock is overpriced is to compare the price line to the earnings line. If you bought familiar growth companies—such as Shoney’s, The Limited, or Marriott—when the stock price fell well below the earnings line, and sold them when the stock price rose dramatically above it, the chances are you’d do pretty well.”
Like Warren Buffett, Lynch stuck to companies and industries he knew or could understand easily. While insisting that good management was vital, he alsoadvised investors to “Go for a business that any idiot can run—because sooner or later, any idiot is probably going to run it.”
Like Buffett, Lynch focused on long-term investments and pretty much ignored all the short-term ups and downs of the stock market.
My Contrarian Ways
Those are three wise men, you’ll agree. Unfortunately, I cannot use exactly the same Value Stock Investing strategy they use if I want to accomplish the goals that I have, because I don’t have their billions in capital. So, I have to do things a bit differently.
First, I enter on a stock’s breakout from the base, while the 3 Giants accumulate their position at the base. It can take them years to accumulate their position, which I cannot do because I am a little fish in the big pond. I cannot afford to tie up my money in a single stock for several years.
Second, the 3 Giants buy stocks. I don’t. I leverage my investments by buying Options.
Third, in addition to Value Stock Investing, I also use Cyclical Analysis when investing.
I learned a lot from John Templeton, Warren Buffett, and Peter Lynch, but they didn’t teach me everything. Over the course of my 30 years of stock market investing, I also learned the power of Technical Analysis, market trends, and theCyclical Investing Strategy: analyzing the Decade Theme, the Stock Market Cycle, the Economic Cycle, and the Dollar/Bond Cycleto see how they will (or will not) fuel the growth of the best stocks.
Finally, I learned how to leverage Options to maximize my profits and minimize my risk.
Put Fundamental Analysis (the three Value Stock Investing giants) together with Technical Analysis, Cyclical Investing, and Options and you have the Adimir investment program . . . and a super-charged rocket to rapid wealth-building.
Author Bio: Frank Liz is the founder of the Adimir Institute of Financial Education, a futurist, and the author of the best-selling The Millionaire Within You and the forthcoming Starving For Answers: How Climate Change, Ignorance, and Greed are Creating a Century of Hunger . . . and What We Can Do About It Now.