Leverage the Art of Value Investing
Contents
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INTRO
There’s one universal rule for making money in the stock market: buy low, sell high. It sounds simple, right? But in reality, it’s one of the toughest things to get right.
If you’ve ever:
- Lost money on an investment,
- Struggled to figure out which stocks to pick,
- Felt unsure about how to grow your wealth,
…then you’re in the right place.
In this brief write-up, I’ll walk you through a winning strategy for investing in stocks.
Let’s get started.
The Ultimate Investing Strategy
The legendary investor Warren Buffett once said, “The first rule of an investment is don’t lose money.” And I take that to heart.
The fastest way to wreck your portfolio is by losing small amounts consistently. This happens more often than a major loss from a single bad trade. It chips away at your wealth over time. So, pay close attention to this next part.
Value investing is the only real strategy that works. At its core, it means buying something for less than it’s actually worth (its intrinsic value). The goal of value investing is to buy at prices lower than they’re actually worth, which may differ from what the Market is saying, and enjoy appreciation over the long term—just like you would when negotiating the price of a house. You’re always trying to get more value than you’re paying for.
Think of stocks the same way. You need to buy them at prices which are discounted to their intrinsic value, or you won’t see the gains. The formula for finding intrinsic value uses discounted cash flow analysis to estimate how a business will perform in the future.
Investors are trying to uncover the company’s current worth and future growth in comparison to the stock’s existing price. In addition, you might also find that a company’s stock is undervalued based on revenue trends and upcoming projects.
But here’s the key: the company behind the stock has to be high quality. You wouldn’t buy a house that’s about to collapse, right?
In this next part, I’ll walk you through one of Buffett’s greatest investments.
Value Investing - Case Study
Value investing is about finding companies that are worth more than the stock market says they are, and Warren Buffett is still a master at this.
Moody’s is a great example of a company with a high intrinsic value. The Company provides an essential service in credit ratings, offering data and intelligence to help businesses make informed decisions. With a strong brand image and customer loyalty, Moody’s has amassed a database of over 450 million companies and credit profiles. As we can see from the below chart, Moody’s net income has been up in the past two quarters.
Warren Buffett's decision to buy Moody's starting in the year 2000 was a classic move in value investing. At the time, the stock was trading at around $10 per share.
Buffett saw potential that others missed. He believed Moody’s had a strong business model and a dominant position in the credit rating market, which created a kind of “moat” protecting it from competition.
Over the next several years, Moody’s business kept generating consistently strong earnings and growth, ultimately reflected by an increase in its stock price. By 2009, Moody's shares had climbed to over $60, a huge increase from when Buffett started buying.
Today, that stock is worth over $450 per share. Buffett didn’t just pick a stock based on its price—he looked at the company’s potential to keep making money over the long haul.
This is value investing in action: buying quality companies when they’re priced at a discount, and then sitting back as their true worth is recognized by the market in the long-term.
Which brings me to my next point.
When Buffett sees a company trading at a price below its intrinsic value—considering both current worth and future growth—he pounces. Moody's, with its strong brand, essential service in credit ratings, and deep financial moat, fit the bill perfectly.
Buffett likely recognized that the market was undervaluing Moody's growth potential. The steady demand for credit ratings in the financial world, coupled with Moody's dominant position, signaled future earnings that the market had overlooked.
For Buffett, it was a no-brainer: buy low, and watch it grow. And grow it did…
Year-to-date in 2024, we can also see that Moody’s stock has been trending up, gaining 24.97% year-to-date from the chart below. With economists predicting that Moody’s price could reach as high as $570 or as low as $385, the stock seems to be priced in the middle.
The Biggest Mistake New Investors Make
Don’t sell too soon! Just like flowers, stocks need time to bloom and grow.
You might be asking why I keep repeating this. It’s because, in today’s world, we’ve become impatient. We want everything now—but the stock market doesn’t work like that.
And if you don’t come to this realization, you’ll never make money in stocks.
If you’re looking for sound investment strategies and to level up your investing game, check out our other blog posts or sign up for our premium newsletter to expand your investment education and grow your wealth.
Disclosure/Disclaimer
As a Tykr affiliate, Raising InvestorIQ earns from qualifying purchases. As a Seeking Alpha affiliate, Raising InvestorIQ earns from qualifying purchases.
Information provided on this site is based on my own personal experience, research, and analysis, and it is not to be construed as professional advice. Please conduct your own research before making any investment decisions. I am not a professional financial advisor, stockbroker, or planner, nor am I a CPA or a CFP.
The contents of this site and the resources provided are for informational and entertainment purposes only and do not constitute financial, accounting, or legal advice. The author is not liable for any losses or damages related to actions or failure to act related to the content on this website.
