The Gamble of Value Investing

      My eventual plan with my investing portfolio is to have five to ten percent of my investments in what will hopefully end up being “value” purchases, with the hope that these investments result in significant capital gains in our household’s available funds. So far, I have not made any of these types of investments, but have been doing a substantial amount of reading, hoping to accumulate as much knowledge from smarter investors than I probably ever will be.

My goal (investing-wise) is to have the following makeup:

10% – Bonds (ETF)
~80% Dividend-producing stocks
~10% in “value” stocks.

My current “obsession” with value investing partially has to do with diversification – moving away from the larger dividend-producing companies that I am currently focused on in order balance the portfolio with smaller and varied companies. The second reason for looking at value stocks as an alternative is the hope for the odd “home-run” on a minimal level of investment to increase the overall investment returns on the way to retirement.

At this point, I would say that I am in the range of “knows just enough to get my self into trouble” when looking at investing opportunities. I will not be fully investing my “Value” money immediately, while I take the time to learn all that I can about this way of looking at the market. Up until now, I was (at a basic level) looking at yield-producing companies and examining whether or not these entities would be able to continue to provide dividends to investors in the future.

Based on my limited knowledge of value investing, there seems to be the following steps involved:

  1. Identify stocks selling at a bargain.
  2. Research the stock extensively.
  3. Buy the stock at your target price.
  4. Wait for the market to figure out what you saw in the company, and buy the shares up to a profitable level.

 

Step one to three makes a lot of sense to me, and the stocks I pick and targets I set are mainly dependent on the research I do and the skill that I select stocks. It’s step four that depends on other investors either believing the same thing I did, or something happening with the company that is the concern with this type of investing. There are going to be times that I’m either wrong, or may enter a position too early that would result in initial losses on the purchase of a stock.

The gamble of investing in stocks that are currently undervalued, based on whatever metrics used to select the stocks is that nobody else will agree with the hypothesis that I’ve come up with, kind of like inviting everyone to a party and then nobody showing up – likely resulting in a similar feeling of dejection on my side.

For me, the potential gains from this portion of my retirement portfolio outweigh the risks associated with this type of investment, allowing for potential capital gains not available from the rest of the securities I have planned to purchase.

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