The hot headlines of the investment world are almost always, “XYZ Company posts record profits, stocks surge.” These headlines are enticing, and can drive investors into a fury. Almost never does one get excited about a headline that reads, “ABC Company posts predicable earnings, dividend modest.” However, when it comes down to it, ABC Company is where most investors end up. Long after the surge in popularity of the growth stocks has waned, the value stocks will be plugging away.
Value stocks typically have steady earnings, and often have a predictable dividend. They are frequently larger companies, like Wal-Mart (WMT), General Electric (GE), or Johnson and Johnson (JNJ). They have solid financials, and can even provide the investor with income in the form of dividends. What defines them as a value stock is stock price that is at or below their book value. Those investors looking for a bargain will pick up these stocks, and then hold them for the long term. Investors in value stocks believe that over time, the market will recognize and place greater value on the steady earnings and reflect it in an increased stock price. Warren Buffet is, perhaps, the most famous value investor. Sophisticated investors around the world study Warren Buffet’s stock holdings for greater understanding of value investing.
Value stocks are not any better than growth stocks, in fact there are many years when growth stocks outperform value stocks, and vice versa. Instead those who are investing for income will prefer the lower volatility of value stocks, and the dividends issued from them. What a value investor needs that a growth investor does not have is patience. Value is based on bargain hunting and holding for the long term. These stocks are not the ones that will offer a quick gain, instead they may stay nearly stagnant in price, compensating with regular dividends.
This stagnation in price can be seen as a downfall to value investing. Most people want to see the value of their stock go up, up, up. But they do not want the risk of it going down. By investing in a value stock they negate the downward risk, by sacrificing the rapid upward movement. Too many people dump their value stocks at the wrong moment because they get fed up with the lack of upward movement. So for those who are not ready to buy and hold a value stock might not be the best fit.
Those with a lower risk tolerance will do well investing in value stocks. These investments are great for those who have closer to a balanced portfolio. Adding value stocks to a portfolio can capture the upward movement of being invested in equities, and reduce their volatility.
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