WEBVTT 00:05.000 --> 00:10.960 In this video we'll talk about three easy simple steps that you can follow to invest in a value stock 00:11.620 --> 00:17.830 the best value investing strategy starts with learning to identify fundamentally strong companies. 00:18.130 --> 00:23.200 If you attempt to profit by buying stocks that have simply dropped in price without first ensuring that 00:23.200 --> 00:28.120 they have the underlying ability to eventually recover there is a good chance you'll experience some 00:28.120 --> 00:29.870 financial loss instead. 00:30.160 --> 00:36.460 In effective value investing formula dictates that we must first look for strong businesses buy when 00:36.460 --> 00:41.540 their stock is undervalued and sell when it rebounds or becomes overvalued. 00:42.210 --> 00:48.270 Now let's dive into each step so you can understand clearly what to do and how you can profit by investing 00:48.270 --> 00:50.100 in undervalued stocks. 00:51.750 --> 00:55.290 Value companies are not named for their positive market values. 00:55.410 --> 01:00.600 Since every company's stock price fluctuates on a regular basis in conjunction with individual news 01:00.600 --> 01:07.110 events or occurrences within the market as a whole a fundamentally strong business is known as a value 01:07.110 --> 01:13.530 company because it possesses actual inherent worth in terms of its consistent earnings dividends and 01:13.530 --> 01:15.300 cash flows. 01:15.300 --> 01:21.330 So you want to make sure you'll only invest in companies with a consistent growth in earnings dividends 01:21.450 --> 01:23.210 and cash flows. 01:23.220 --> 01:27.250 These companies usually have a sustainable competitive advantage over their rivals. 01:27.370 --> 01:32.540 That keeps them in the game regardless of what their stock price may be doing from day to day. 01:32.760 --> 01:39.480 And it's this competitive edge that gives businesses a protective economic moat economic mode is something 01:39.480 --> 01:43.480 that helps a business remain financially competitive over the long term. 01:43.740 --> 01:49.530 We'll go into more detail about economic moats in the next module's even if negative events can cause 01:49.530 --> 01:52.480 a fundamentally strong company stock price to dip. 01:52.530 --> 01:54.190 And here's an important thing. 01:54.450 --> 02:00.000 If that company can maintain its ability to continue operations as usual it will rebound in time to 02:00.000 --> 02:04.040 a market price that is more in keeping with its true value. 02:04.050 --> 02:09.600 I want you to note that investors tend to have emotionally short memories they won't remember what happened 02:09.600 --> 02:14.430 with the company in the past and they only care about the present and the future. 02:14.460 --> 02:20.130 So as long as a company continues to demonstrate a consistently growing net income and cash flow it's 02:20.130 --> 02:26.160 very likely to not only eventually regain its former glory after a price drop but to become overvalued 02:26.160 --> 02:33.160 some day because investors start to recognize all over again what a great value it represents and when 02:33.160 --> 02:38.470 looking for fundamentally strong businesses some additional factors you should keep in mind are low 02:38.470 --> 02:45.010 debt and the presence of a strong and responsive management team overall if a company has a history 02:45.010 --> 02:50.480 of performing well you can predict that it will continue to do so over the long term. 02:50.590 --> 02:55.960 Once you've identified businesses that are fundamentally strong and that have a high intrinsic value. 02:56.140 --> 03:02.940 Your next step is to add them to your watch list so you can buy them if and when they become undervalued. 03:05.440 --> 03:10.780 Under normal circumstances stocks that are financially strong and that demonstrate promising future 03:10.780 --> 03:14.070 prospects are maybe too expensive to buy. 03:14.200 --> 03:19.840 For this reason a fundamentally strong business doesn't always represent a good investment because its 03:19.840 --> 03:22.480 stock value will have little potential to increase. 03:22.540 --> 03:27.100 If you buy it when it's already trading at a price that's more or less in line with the company's intrinsic 03:27.100 --> 03:28.450 value. 03:28.450 --> 03:34.210 So in short you need to learn how to find undervalued stocks so you don't end up buying them at the 03:34.210 --> 03:35.330 wrong time. 03:35.740 --> 03:37.740 But there's good news. 03:37.900 --> 03:43.700 A strong company can easily become temporarily undervalued for a number of reasons. 03:43.750 --> 03:49.780 These include onetime events such as internal scandals or negative news reports that caused disillusionment. 03:49.990 --> 03:55.240 But make sure that these events don't cause the company to lose its competitive edge or its ability 03:55.240 --> 03:57.210 to go about its business as usual. 03:58.020 --> 04:03.300 If you wait for such occurrences as a company failing to meet its projected earnings a downturn in the 04:03.300 --> 04:09.390 economy a significant change in a company's business environment or similar types of bad news you'll 04:09.390 --> 04:14.380 find many great opportunities to buy a great stock at a very low price. 04:14.430 --> 04:17.160 These events will likely cause a stock price to drop. 04:17.310 --> 04:22.360 And when this happens chances are it will become undervalued or cheaper to buy. 04:22.770 --> 04:28.450 And as a value investor you simply buy low and then sell high to make a profit. 04:31.140 --> 04:35.970 Now that you understand the best time to buy into a financially strong company is when its stock has 04:35.970 --> 04:37.370 become undervalued. 04:37.500 --> 04:41.460 You also need to know when to sell that stock in order to make a profit. 04:41.910 --> 04:46.860 Although we know that a high quality company can be temporarily affected by negative market news that 04:46.860 --> 04:49.350 causes its stock price to plunge. 04:49.350 --> 04:55.440 We also know it's very likely to recover over the long term and in the same way the bad news can cause 04:55.440 --> 04:57.330 a company stock price to drop. 04:57.360 --> 05:03.410 Good news can have the opposite effect and cause its price to surge during this recovery period. 05:03.480 --> 05:08.370 When a company publicly announces how well they did financially for the previous quarter that makes 05:08.370 --> 05:12.780 investors feel excited and they want to invest their money in that company. 05:12.930 --> 05:17.190 And when the demand increases the stock price simply goes up. 05:17.190 --> 05:22.950 In either case whether business simply recovers its true value in time because of its intrinsic value 05:23.190 --> 05:28.240 or becomes suddenly overvalued as the result of some positive event like share buyback. 05:28.290 --> 05:31.710 It will be the time to sell your stock and take your profit. 05:31.770 --> 05:35.350 In the spirit of buying low and selling high. 05:35.490 --> 05:41.490 So I want to pay close attention to these events because they can help the stock price go up very quickly. 05:41.760 --> 05:47.670 And you'll also have to be quick to sell your stock and take the profit share buybacks and stock splits 05:47.670 --> 05:53.520 are common events that can lead to an increase in a company stock price share buyback is a program by 05:53.520 --> 05:58.860 which a company buys back its own shares from the marketplace usually because management thinks the 05:58.860 --> 06:04.980 shares are undervalued and stock split happens when a company divides its existing shares into multiple 06:04.980 --> 06:08.460 shares to boost the liquidity of the shares. 06:08.580 --> 06:14.730 So as a value investor we can take advantage of these golden opportunities to sell our stock at a temporarily 06:14.730 --> 06:21.210 high price and make a higher profit in the stock price tends to go up during a bull market or economic 06:21.210 --> 06:28.170 upturns and events like mergers and acquisitions can also lead to a significant movement in stocks. 06:28.170 --> 06:34.800 A merger is when two companies merge together in acquisition is when one company buys out another company. 06:34.920 --> 06:40.290 So you need to pay attention to these events especially the earnings announcement because it happens 06:40.290 --> 06:41.890 almost every quarter. 06:41.970 --> 06:46.660 So will have at least four times a year to make big profits in the next lecture. 06:46.670 --> 06:52.930 We'll talk about price and value which is a very important topic in value investing OK. 06:53.000 --> 06:54.230 See you in the next video.