Our Los Angeles based financial advisors specialize in wealth management and retirement planning and have received client inquiries about value investing–the process where an investor selects companies whose stocks are currently undervalued by the market. This type of investing has regained considerable popularity following the bursting of the growth-oriented technology bubble.

If a company with a solid history of good financials is being overlooked by the market, or if it is being beaten down by the market for temporary reasons (e.g. a new product launch is receiving tepid consumer reaction, a new movie is bombing at the box office, the CEO is undergoing heart surgery), a value investor regards this as a buying opportunity with the expectation that their prices will eventually rise to their true worth when the market adjusts or after the company’s temporary issues or problems are remedied. It is critical to understand the following about value investing:

• Be patient. This can take weeks or years, but it is at that time when you have the potential of a capital gain.
• Be willing to research your investment candidates and their industries thoroughly.
• Be willing to stand your ground when the pundits and the stock market in general say otherwise.
• Be able to let a stock go when you find that its fundamentals have changed significantly.

Most value portfolio managers screen first for fundamental measurements such as price-to-earnings (P/E) and price-to-book (P/B) that are lower than the S&P 500, and then analyze each company’s financial statements. The key is not to invest in cheap stocks necessarily, but in those whose companies are currently undervalued by market over-reaction, misperception, and short-term focus, and whose stocks have catalysts for potential, long-term capital appreciation. This only comes from companies on a sound financial footing with a good track record.

From this short list of undervalued, financially sound companies, conduct a thorough qualitative evaluation by reviewing annual reports, SEC filings, press releases, and web sites. Talk to suppliers, customers, and competitors with the goal of truly understanding the companies—their management in particular—and the industries in which they operate.

It is preferable to invest in companies whose management has demonstrated long-term competency and integrity, and whose top executives have been in place a long time. Researching what suppliers, customers, and competitors have to say about a company can be particularly revealing. If a company is on solid ground with their suppliers and customer base, this can be an advantage against their competitors.

In contrast, if a company is constantly having difficulty with key suppliers or distribution channels, this could spell trouble going forward. Similarly, if customers are constantly complaining, or worse, defecting to the competition, this would not bode well. Interviews with the competition can be a sign of their shifting competitive landscape in terms of changes in market share, target market, pricing power, and geographic penetration.

Bottom Line: Value investing is very methodical, requiring equal doses of quantitative rigor and qualitative insight, and a great deal of patience. It’s challenging to identify these companies and can take 3-5 years or longer before the market “bids up” a value stock to its true worth. However, value investing can be well worth the effort and the rewards can be great to those who commit the time and refuse to pay retail.

Our Los Angeles based investment advisory team has been assisting clients with financial planning and wealth management for more than a decade. Please call us at (800) 632-2463 if you have any questions!

Are you a single, recently divorced, widowed, or retired woman? If so, we suggest you hire a financial advisor/fund manager to assist you with the challenges of managing your finances. According to the National Center for Women and Retirement Research, over 75% of women are widowed at an average age of 56, and 1 in 4 of these women are broke within two months of being widowed. Having a financial advisor/fund manager will ease your financial planning worries and ensure that your best interests are being taken into account. See below for our top 5 tips for women in transition to remember when selecting a financial advisor/fund manager.

1. Get Multiple Referrals:
A good place to start is with a close circle of friends – people who have the same social economic background that you do. Ask them if their advisor is doing a good job and if they are comfortable with them. But don’t stop there….Ask your lawyer or attorney, someone who prepares your taxes, a CPA, etc., because when you get a referral from another trusted financial professional, they are putting their reputation on the line. They’re not going to refer you to somebody unless they are 110% sure about them. There are also a lot of websites that you can go to for referrals. One website that we have seen and liked, is WiserAdvisor, which is a new service that offers a list of advisors that fall into what you’re looking for. You have to make that first contact and do the initial screening, but this site will give you some ideas.

2. Do Your Due Diligence:
You’ve got to make sure that the person you’re talking to is qualified! Anyone can throw up a designation, but it doesn’t mean that they are necessarily good. It’s very much like interviewing someone; you have to look at your potential advisor’s resume and testimonials. Not just if they have a designation, rather what have they done in the last 5 or 10 years, where have they worked and what have their previous clients said. I recommend contacting the state regulator to see if that advisor has had any complaints, or if the advisor has been sanctioned or disciplined to make sure they have a clean background. You can also get a lot of the information about an advisor from the biographical section of their website. If you want a more chronicled representation of the advisor’s background, you can get that from their ADV form (only registered and expert advisors have to file an ADV form with the FCC).

3. Check For Compatibility:
You need to be a match with your financial advisor. Look into their investing style, portfolio management style, and advisory style to see if it is compatible with yours. Some advisors are a little more aggressive than others, some take a shorter term or longer term approach, different methods of operation and again all this information will be forth coming from their website. Get familiar with what their investment approach is, what their investment philosophy is and trust your gut.

4. Ask About Compensation:
Decide what works best for you – a fee based or commission based advisor, or a hybrid of both.

5. Inquire What Services Are Involved:
Another thing to consider and inquire about are the services offered, as not all advisors do everything. Some do estate planning, some don’t, some do insurance, some don’t, some take a more holistic approach toward their clients’ needs, and others don’t. Ask yourself, do I need someone who is going to be everything to me, cover all my bases, or do I just need someone who is going to take care of my insurance or put me in mutual funds? Also consider what kind of financial planning services you need and consider those advisors who provide those services.

If you have any questions about selecting a financial advisor/fund manager, please contact us, we’re here to support you!