Smart Investing in Today’s Stock Market
Getting ahead in the current economy requires taking time to increase our financial knowledge, and investing in the stock market is still a great way to test what we learn.
A long standing method of purchasing profitable stocks, which has been made famous by the likes of Warren Buffett, is called value investing. A basic definition of this style is the purchase of securities in well-managed companies with outstanding cash generating potential at a below market price.
Although not a new idea, the original premise has evolved since it was first introduced in 1928 by Ben Graham, an economics professor at Colombia’s School of Business. While it should seem obvious to an investor today to look for the best companies at the lowest prices, his approach provided a deep analysis to work with when choosing stocks.
The paradigm was carried on and enhanced by several protégés, including David Dodd, and of course the famous Warren Buffett. The framework created by Mr. Graham so many years ago still requires a detailed approach to choosing where to put one’s money. It is not a magic potion, but it helps reveal solid values.
A good example of this style is how one will look at a company’s intrinsic value, or worth according to an analysis of business operations and products. The goal is to uncover the true qualities of the company to determine if it is below the market cost. When looking at put options and call options, if the margin between the stock and strike price is in the negative, it has an intrinsic worth of 0.
In a world where mutual funds have been earning sordid reputations lately, fund managers are under pressure to provide a decent return, and following the intelligence of Mr. Buffett and others is not the only way to do it.
A smart portfolio can consider a focused approach in a specific niche, such as an equities fund. Purchasing shares in an all equities mutual fund, also known as an ETF, will consist of private stocks as well as readily available offerings. This type of fund turns its cheek to the common wisdom of diversifying, and targets equity securities, which have historically performed better.
The risks in this asset class are great, especially in a shrinking economy. However, as with any sound investment strategy, it is important to do proper research and analysis; this alone results in greater returns the majority of the time.
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