How to Value Invest

Ready to get started with Value Investing? Here is my “How to Value Invest" guide to this investing methodology.

It is not prescriptive, but following the steps outlined below will provide you with the best possible outcome.

1. Prerequisites

To complete the next step of setting your investment criteria and developing your checklist, I recommend and urge you to first:

  • clarify and understand your investment goals, and
  • ensure you have an introductory level of investment literacy.

If you have not done so, I recommend that you complete our free online Investing Course. Your Financial Plan, your Risk Profile and the investment strategy you follow will all have a direct bearing on the investment criteria you set in the next step of this How to Value Invest guide.

2. Investment Criteria Checklist

You are investing for a purpose - to reach your financial goals. So, you need to find quality businesses to invest in. While taking care not to let emotion dictate your decisions. The decision has nothing to do with how you feel about the product or service a business provides. Your decision making needs to be based on facts. Only these will help you identify a business’s investment potential.

Using a checklist to evaluate each investment opportunity is a great way of preventing your investment decisions being swayed by your emotions. Each business should tick all the boxes for the specific criteria listed on your checklist before you invest.

Image of use of checkboxes

Before you start looking for businesses to invest in (the next step in this How to Value Invest guide) I encourage you to develop your own checklist of investment criteria. Everyone’s checklist will be different as these are based on the criteria that is aligned with their investment needs. Our Screening Checklists resource page has a couple of checklists and criteria that you can use as examples.

3. Finding potential businesses to invest in

Some of the investment criteria on your checklist will assist you in finding potential businesses to invest in. For example, if one of your criteria is that your investments need to provide you with an income then you will mainly be looking for dividend paying companies. Of the approx 5,100 stocks on the USA exchanges (i.e. Dow Jones, S&P 500, and NASDAQ) in 2015 only 2,100 paid out a dividend, and of those only 680 paid out more than 70% of their profits as dividends. How did I find this out? By using a stock screener. Using stock screeners is a great way to narrow down the large lists of businesses listed on the stock exchanges in the countries you are interested in investing in.

Using a screener of your choice you can find a list of potential companies to invest in. Then you use your checklist to refine the list. You are then ready to evaluate each of the shortlisted businesses.

An alternative approach is to look for the best businesses in your “circle of competence” (i.e. the industries and businesses you know and understand) and evaluate them. For example, if you know how the insurance industry operates and how insurance businesses make money then you would evaluate the leading listed insurance businesses against your checklist.

Finally, keep an eye on the business section of your local paper, find some good blogs to follow on the Internet, and seek out other sources of business investment tips. A lot of the tips will not suit your investment criteria, and most of the tips will be for “hot” stocks that will be over-valued. However, keep an eye out for stocks that are going out of favour. If you can understand the reason for a stock’s decline in investor interest and can see it turning around in the future then you could be on to an opportunity.

4. Evaluation

Once you have identified a potential business, it passes all of the criteria on your checklist and you are satisfied that the company is a business you would like to invest in then the next step is to assess the value of the company.

Valuing the Business

Using the company’s financial data published in it’s annual reports and quarterly updates, or historical data as provided on research websites like, you now need to estimate the Intrinsic Value of the business.

Over the year's I've developed my own method for valuing businesses. The details of which I hope to cover in a future “Value Investing" online eLearning course, as it's too detailed to put on a simple we page. However, I do have an online simplified version of my Intrinsic Value Calculator that you can explore and use right now. Check it out and see what you think of the estimated Intrinsic Values it provides you.

5. Time to buy?

Armed with your estimated intrinsic value for the company, and accounting for your Margin of Safety, you can now watch the market price for the business’s shares. If the market price is below your intrinsic value estimate minus your margin of safety then it’s time to buy.

If the market price is too high then put the business on your watch list and keep an eye on the company’s share price until it dips below your time-to-buy threshold. However, remember to recheck your intrinsic value estimate as the company reports its quarterly, half yearly and annual earnings and publishes its financial reports.

What if the market price dips, so you buy, but then the market price keeps falling? If you have additional funds available to invest then you have an opportunity to use dollar-cost-averaging to your advantage and buy more shares - this averages the buy price for the combination of the two share purchases. It may appear counter intuitive to buy more shares when the price drops. However this is actually a great opportunity to drop the total price you paid per share and make a bigger profit when the share price rises. Which it will if you have selected a great business to own.

6. When to sell?

To round out this How to Value Invest guide we also need to cover "when to sell". Some investors use Value Investing to find and buy businesses at the right price and then hold them for the long-term - much akin to the buy and hold strategy. Other investors sell their shares when the market price is above the intrinsic value of the company by a certain amount. Some “take the profits” by selling some of their shares but leaving their original investment amount in place.

I believe in accumulating ‘assets’ (remember "assets make you money, liabilities take your money"), so I try to keep my assets. However, if I feel the business is no longer a great asset for us to invest in then I'm happy to sell the asset.

Like for your buying criteria (your checklist), I recommend that you set your selling criteria as well.

Still have questions? Please feel free to reach out to me using the contact page and I'll try to help where I can.

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