Keith Fitz-Gerald

Five Keys to Value Investing Profits

by Keith Fitz-Gerald   11/20/08

As for the notion that "value" investing is broken, we don't buy into that. Studies show that investing styles come and go. For instance, indexing might hold sway for a while, until it gives way to a total-return strategy. Then the momentum players hold the majority. And so on.

What's important to understand, however, is that styles don't work all the time; they work over time, which is why it is more important than ever to maintain a laser-like focus when the going gets tough. The following five guidelines can help you keep that focus.

Five Keys To Consider Right Now

* Be Patient: Investors have fled the markets in droves lately. According to TrimTabs Investment Research, mutual fund investors have pulled $175 billion out of stock funds so far this year, with $56 billion of that capital exodus taking place in October alone. This is the first year that equity flows have been negative since 2002, which reaffirms something we frequently point out: Investors tend to rush in at market tops and out at market bottoms. And that suggests that we may be approaching a bottom -- even if it's not immediately apparent.

* Rebalance: Tough markets can really skew your financial perspective. And your portfolio balance. "Rebalancing" can help you get back on track to higher returns, as we've mentioned in the past. Not only does rebalancing force you to take profits, but it also encourages you to put more money to work in areas that have been hit the hardest (and which are also poised for the biggest-potential rebounds, studies show).

* Look For Consistency: As redemption requests mount and conditions deteriorate, some value funds are shifting managerial styles in an attempt to make up lost ground. Not only does this suggest that these funds never had a strategy to start with, but it also suggests a lack of discipline, which is exactly what we don't want right now. Studies show that value funds, in particular, tend to rebound more sharply than other investment choices because they're often chocked full of quality stocks trading at deep -- but temporary -- discounts.

* Make Sure Value Really Is Valuable: "Value" has many different meanings, so it's important to make sure you understand what the term means when it comes to picking a suitable investment. For some managers, value means companies that are simply trading at steep discounts to other stocks. For others, it means a concentration on those stocks trading in predetermined ranges, perhaps as measured by such indicators as Price/Earnings (P/E) or Price/Book (P/B) ratios. Different definitions can lead to vastly different types of stocks.

* When Buying On The Cheap, Understand That Near Term Outlook Often Stinks: During good times, value investing is often about buying companies that, at least in the near-term, have fallen on hard times. Now, however, pretty much everything is "cheap," so the more important issue is identifying those companies with superior fundamentals and improving outlooks that may simply be caught in this bad-market maelstrom.

After all, Wall Street knows the price of everything. But very few people understand the value of anything.

---

Keith Fitz-Gerald is the Investment Director for Money Morning/The Money Map Report. For more information on Keith, read his bio here.