Via Yahoo Finance

John Maynard Keynes is considered to be one of the most influential economists of the 20th century. He is also thought to have been a value investor. Value investing is the style of investing established by Benjamin Graham and since championed by Warren Buffett.

Maynard Keynes built up a spectacular fortune, lost it in the 1929 stock market crash, and, with time, regained it. Keynes’ investment philosophy rings true to Buffett’s. Seek value in a company, then buy and hold for the long term.

Why is intrinsic value important?

Intrinsic value is the investor’s perception of the inherent value of a stock. Value investors choose investments that look cheap, in relation to their intrinsic value.

When you can buy something at a discount, you can achieve the goal of financial growth. “Price is what you pay, value is what you get,” as Buffett famously said.

Is the price quoted for the stock really what it is worth, or is it too high or too low? If it’s low, then it’s trading at a discount and could potentially be a good buy. 

Balance risk with a diversified portfolio

Just as you shouldn’t put all your eggs in one basket, it’s wise to hold shares in a variety of sectors. For example, fast moving consumer goods such as washing powder and disinfectant don’t go out of fashion and are required even when the economy is suffering. Pharmaceuticals and defence are other sectors that are necessary whatever the weather. Entertainment stocks on the other hand can go out of favour pretty quickly if people don’t have money to spend.

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Unforeseen external factors can also affect entire sectors as the coronavirus pandemic has shown. It took airlines and entertainment sectors out in one fell swoop, while healthcare stocks were given a boost.

Should I buy shares during a stock market crash?

A fluctuating stock market provides buying opportunities, but it scares many people to buy when uncertainty abounds.

Keynes summed this up when he said: “It is largely the fluctuations which throw up the bargains and the uncertainty due to the fluctuations which prevents other people from taking advantage of them.

This rings true during stock market crashes and that’s why Warren Buffett famously said, “Be greedy when others are fearful and fearful when others are greedy.

Provided you follow the value investing principles and are careful in your stock picking process, a stock market crash could prove the perfect time for you to buy shares. Many successful value investors have done so in past market crashes.

Why does value investing work?

I think value investing works because it uses common sense. When you understand how a company works, are confident it is run with integrity, and has the potential to grow, then you are surely on to a winner.

Too much money is lost in the stock market by investors buying on a hunch or vague notion that the company could do well. The investors that take their time to buy stocks in companies they believe in are rewarded because they have done their homework and reduced their risk. If you are careful in choosing your investments, then the stocks you buy should prove their worth over time.

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The post Value investing! Why the stock market strategy of Warren Buffett and John Maynard Keynes works appeared first on The Motley Fool UK.

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Motley Fool UK 2020