Common Characteristics of Value Investing Stocks

There are several common characteristics that often present themselves in stocks that are thought to be attractive to those who follow a value investing strategy.

These have been written about extensively by famous value investing firms such as Tweedy, Browne & Company, and even Benjamin Graham himself.  By understanding the traits that frequently manifest themselves with successful value stocks, one can better learn to spot them.

The Most Common Traits Found In Value Investing Strategy Stocks

Typically, value investing strategy stocks have one or more of the following characteristics:

  • Low price to earnings ratio
  • Low price to book ratio
  • High dividend yield
  • Low price to sales multiple
  • Discount valuation relative to industry peers
  • Lower PEG ratio than comparable industry peers
  • Current market price trades at a substantial discount to conservatively calculated net present value of all future earnings
  • Strong balance sheets with little or no debt
  • Established history of dividend payments, sometimes stretching back 25 years or more
  • Share repurchase programs in place causing the actual total outstanding shares to decrease over time
  • Real, tangible assets backing every share such as factories, real estate, or cash
  • High return on equity (for those following the Charlie Munger value investing strategy)
  • Boring businesses without a lot of competition
  • High fixed charge coverage ratios
  • High interest coverage ratios
  • High dividend coverage ratios

Your Value Investing Portfolio Will Come to Represent Your Personality

As the famous economist once mused, a series of investing decisions, taken over one’s life, will start to present a startlingly accurate portrait of his personality.  Those who follow a value investing strategy are no exception.  Both Walter Schloss and Charlie Munger followed the same value investing principles, yet their portfolios couldn’t have looked any different.  The former collected cheap businesses that traded at a discount to book value regardless of the quality of the underlying company.  The latter bought only excellent businesses he could hold for a long period of time that would generate torrents of cash for redeployment, preferably held through a tax-advantaged account.  Both men grew exceedingly rich.

The secret to success is keeping your value investing principles consistent.  If you aren’t able to watch your holdings fluctuate wildly, like Charlie Munger did when his partnership lost 70%+ over two or three years in the 1970’s, don’t become a focused value investor.  Instead, practice widespread diversification.  Likewise, if you want to maximize your gains and aren’t emotionally worried about big price swings in the market value of your stocks, focused value investing may be a better choice for you.  In other words, know thyself.  If you achieve that, you will be miles ahead of most new investors.

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  • Andrew

    I take it you follow the Munger approach more than the Schloss 🙂

    • Absolutely. I sleep better at night knowing that regardless of whether we enter inflation or deflation, growth or recession, high taxes or low taxes, certain types of companies are superior and capable of generating large sums of surplus cash relative to owner investment. I’d rather own ten of these and do nothing for 50 years than constantly have to buy and sell cheap, subpar assets nobody wants. It’s more difficult and the commissions, taxes, spreads, and fees are higher, too.