Psychology of a Value Investor: When To Buy and When To Sell

The subtitle to this article should really be: "How To Be A Value Investor," or "What It Takes To Be A Value Investor," without having to read an entire book on the subject.

But first, we should briefly define a few terms because you will notice that ALL of these decisions center around ONE relationship: The current market price of a stock vis-à-vis its intrinsic value.

What is intrinsic value? Intrinsic Value is actual or 'true' value of a stock (or a company). What does this mean? Intrinsic value is the price, or price range, that an investor will place on a stock or company after performing fundamental analysis.

What is fundamental analysis? Fundamental analysis is the process that investors go through to determine a stock or company's intrinsic value, in order to make the decisions were able to describe below. This analysis will include examining the big picture economic and industry conditions, to company specific financial and qualitative factors.

The objective of uncovering a stock or company's intrinsic value is to make one of the following decisions:

Hold or Consider Buying:

When the market price of a stock equals the intrinsic value of a business, the value investor may consider buying it.

Buy and Potentially "Load Up The Truck":

When the market price of a stock is less than the intrinsic value of a business, the value investor may get excited about buying it, as it may be a true buying opportunity.

Sell or Not Buy:

When the price of the stocks soars well beyond the value of the company, the value investor sells, or simply avoids it altogether.

In other words:
Underpriced = Buy or Hold 
Overpriced = Sell or Do Not Buy

Markets fluctuate, go boom and bust, or simply follow the business cycle with natural ups and downs. Even the top companies in their industries can see significant drops on the price of their shares. Conversely, when the market is in the bubble stage, the tide will raise the market price of all stocks regardless of their value.

There is an old trading adage to describe this trading psychology:

"You're buyin' when they're cryin', and sellin' when they're yellin'"

Contrarian investing

Value investors are not crowd followers. They are a different breed. Value investors stay away from the popular and exciting - the hot new IPOs, penny stocks, etc. - because by definition, popular stocks are not bargains!

Nowhere was this idea researched so thoroughly and recently, than in Jeremy Seigel's latest book, "The Future for Investors," which I highly recommend you read.

Value investing is an approach to investing, an investing discipline, a thought process; it is not a specific formula or set of technologies applied to investing. It is art and science. It is patience and discipline.

I know this is a LOT to think about, but let me leave you with one more thought, a quote I just read this last week that I'd like to share with you:

"As prices rise, prospective future returns fall" - John P. Hussman, Ph.D

To Your Investing Success,

Kevin
The 360 Investing Guys

The 360 Investing Guys focus on investing for beginners. This is a HUGE distinction, because if you're reading this article right now, ask yourself how often you have read an article or listened to an interview, and didn't understand some of the language being used, or worse (!), had no idea what they were talking about?