The practice of purchasing stocks when they seem to have fallen below their intrinsic or book value is referred to as value investing. Those who invest using this strategy are usually actively searching for stocks on the market that they believe are undervalued. Value investors watch for seasons when other investors are overreacting to news, whether good or bad. This reaction results in movement in the price of stocks. This movement often produces great opportunities to purchase stock at a highly discounted price.

One of the most popular value investors is Warren Buffet. There are other prominent value investors such as Benjamin Graham, David Dodd, Charlie Munger, Christopher Browne, and Seth Klarman who is a billionaire hedge-fund manager.

Here are three principles that you must follow to be successful at value investing:

1. Act Based on Sound Knowledge

Effective value investing is done from great research. Do your homework and ensure that you properly understand the company that you are thinking of investing in. You will need to know the long-term plans of the company. The business principles on which a company operates can also impact their future. Be sure to get an understanding of these principles. The company’s financial structure and team are other factors that you must study to determine whether you should invest.

2. Seek Diversification

It is never a wise idea to rely on one form of investment. Successful investors usually maintain a portfolio of different types of investments. This strategy brings about some amount of protection from major losses. Maintaining a diversified portfolio while implementing value investing will help to ensure that you experience annual returns. This does not mean that annual returns will be guaranteed.

3. Chase Sustainable and Steady

Many people crave that one investment that will take them from a net worth of thousands of dollars to a net worth of millions. We are not saying that this is impossible; however, this rarely happens. Great investment opportunities come from time to time, but even great investments take time to significantly increase the value of your portfolio. Value investors typically chase investments that are sustainable and that provide steady returns.

These three principles are critical to value investing. You can have great success in this form of investing, but you must be diligent. Value investors are often ahead of the news when it comes to great investment opportunities. As a matter of fact, if you sit and wait until you hear about the “once in a lifetime stock options” on the news, you will most likely have missed the true opportunity.

Rahul Iyer