Why Value Investing Pays Off

Toronto-Dominion Bank (TSX:TD)(NYSE:TD) is a great investment option for value investors, and for good reason.

| More on:

It may not be as exciting as looking at trends, indicators, buy and sell signals, but value investing can often be the safest strategy for your portfolio when you’re looking to build wealth for the long term.

Growth is appealing, but it also comes with risk

Growth stocks like Facebook, Inc. can certainly offer a lot of upside, but there’s also a lot more risk involved there too, and with tech stocks, it’s always about the latest and greatest trend, and it’s easy for a stock to get left behind.

BlackBerry Ltd. is a perfect example of a tech stock that has had to reinvent itself after being unable to stay competitive in the handheld market. Once a top stock in the industry, many people today are surprised to learn that BlackBerry is still around.

Bank stocks often provide lots of value

With value investing, you’re looking for good buys — stocks that trade at reasonable multiples and have good financials overall. Bank stocks like Toronto-Dominion Bank (TSX:TD)(NYSE:TD) are often good value buys, and that’s why Warren Buffett always likes to invest in that industry, because it’s a great way to earn stable returns over the long term.

TD trades at a very modest multiple of around 13 times its earnings and has a strong business model that isn’t in any danger. The bank stock actually has a lot of growth potential outside Canada, and that makes it an even more appealing investment.

However, bank stocks aren’t the only place you can find value.

My experience

One of the first stocks that I invested in that grabbed my attention was NeuLion, Inc. The company had high margins, no debt, and what I thought was a great product, and so I invested when I saw a dip in price.

Unfortunately for me, the stock price continued to drop — heavily. From the time that I bought in at over $1 a share, the price fell to less than half of that value within a year. I did what I thought was crazy at the time — buy even more as the price went down. However, if the stock was a good buy at $1, surely it was an even better buy one at $0.80 and $0.70.

The problem is, when you keep digging, you can get yourself into an even bigger hole. So, I stopped even looking at the price, and decided to let things play out. As tempting as it was to sell, and with charts suggesting that the stock was going to crash even further, I resisted the temptation and stuck with it, because I knew it was heavily undervalued.

And then, one early March morning, after I had finished writing an article for this site, I checked to see how the markets were doing. To my surprise, I saw that NeuLion had been bought out for US$0.84, which was well above my average price. Within an instant, my losses turned to gains, and my faith in the system was restored.

Bottom line

What I learned is that the biggest struggle when it comes to investing is simply to resist that urge to get caught up in the hype or pessimism that stocks can lure you into. As long as a company’s business model is still strong and has good value, some bad results shouldn’t change your overall outlook.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

More on Stocks for Beginners

woman looks out at horizon
Stocks for Beginners

Here’s How Much Canadians at 35 Need to Retire

If you want to create enough cash on hand to retire, then consider an ETF in one of the safest…

Read more »

Concept of multiple streams of income
Dividend Stocks

Got $10,000? Buy This Dividend Stock for $4,992.40 in Total Passive Income

Want almost $5,000 in annual passive income? Then you need a company bound for even more growth, with a dividend…

Read more »

RRSP Canadian Registered Retirement Savings Plan concept
Dividend Stocks

Watch Out! This is the Maximum Canadians Can Contribute to Their RRSP

We often discuss the maximum TFSA amount, but did you know there's a max for the RRSP as well? Here's…

Read more »

a person looks out a window into a cityscape
Dividend Stocks

1 Marvellous Canadian Dividend Stock Down 11% to Buy and Hold Immediately

Buying up this dividend stock while it's down isn't just a smart move, it could make you even more passive…

Read more »

Blocks conceptualizing the Registered Retirement Savings Plan
Dividend Stocks

CPP at 70: Is it Enough if Invested in an RRSP?

Even if you wait to take out CPP at 70, it's simply not going to cut it during retirement. Which…

Read more »

worry concern
Stocks for Beginners

3 Top Red Flags the CRA Watches for Every Single TFSA Holder

The TFSA is perhaps the best tool for creating extra income. However, don't fall for these CRA traps when investing!

Read more »

Data center woman holding laptop
Dividend Stocks

Buy 5,144 Shares of This Top Dividend Stock for $300/Month in Passive Income

Pick up the right dividend stock, and investors can look forward to high passive income each and every month.

Read more »

protect, safe, trust
Stocks for Beginners

2 Safe Canadian Stocks for Cautious Investors

Without taking unnecessary risks, cautious investors in Canada can still build a resilient portfolio by focusing on safe stocks like…

Read more »