Value Investing

Value investing is an investment strategy which look out for stock which its price is cheaper its true/intrinsic value.The time frame for value investing is usually long term like 5 years or 10 years.

Warren Buffets, the world most famous value investor, recommends that we should hold on to the value stock FOREVER! Now, we don't simply hold on stock forever. We need some methods to evaluate the true value of the stock. Discounted Cash Flow is one of the method we used to value stock. The undervalued stock should also fulfill the following criterias:

1. Competitive Advantage

It means that the business that you are investing in should have a greater competitive advantage than its competitors. For example, Walmart is large scale and good reputation that it earns over the years. If there is a product that you can find in any department store, it is also signal that it has good economic moat. Coca cola, P&G are some of these example. In general, a good product with strong competition advantage wouldn't run out of business if its competitor lower its price

2. Consistently Increasing Earnings, Revenue, and Net Operating Cash Flow Over Consecutive Years

The revenue and earning figures can be taken from the income statement of the company financial report. The cash flow figure is found under the cash flow statement.

Good sign of business growth
 - earnings increasing
 - revenue increasing
 - operating cash flow increasing

Red flag signal problem in the business
 - company with revenue decreasing could means that it is losing business
 - increasing earnings yet the revenue or cash flow is decreasing or even negative could signal that the company is faking its report
 - negative cash flow in more than 2 consecutive years

3. Low Capital Expenditures and Operating Margin

The capital expenditure of the company should be low. When this amount is low it mean that the company require low maintenance and thus have high value of free cash flow
    
    free cash flow = operating cash flow - capital expenditure

A company with positive free cash flow means that it have money to re-invest back into its business and also have money to distribute to its shareholders as dividend

4. The Director of Management Is Holding On or Buying In Their Share

The director and management knows more about their own company situation than anyone. If the director is selling huge percentage of this share it could mean that there is problem with the company soon. Investor can easily check this status under the "insider trade" section of many investment website like moneycentral.com or morningstar.com

5. Undervalued Stock Price

Using the suitable stock valuation method to calculate the intrinsic value of the company stock price. If the current market price is way below the intrinsic, it mean the stock is selling at huge discount now and tock that has its market value price 25% below its intrinsic value is considered a good investment