Value investing and long-term investing are always debated among stock investors. Considering the risks and volatility of the stock market, are these strategies truly effective? In this article, we will deeply analyze the concept, issues, and real-life examples of value investing and long-term investing to examine their effectiveness.
Definition of Value Investing and Long-Term Investing
Most stock investors aim to hold stocks for a short period to maximize profits. However, experts have introduced the concept of ‘value investing,’ claiming that it is possible to make short-term profits, and if held long-term, it will guarantee returns. However, the problem lies in the ambiguous definition of value stocks.
Issues with Value Investing
For value investing to be effective, the stocks we invest in must truly have value. However, the definition of value stocks is not clear. Growth stocks are defined as those whose net income has been increasing over the long term and is expected to reach new highs each business cycle. However, no one can guarantee that a company’s net income will continue to hit new highs.
Case Study: The Limits of Value Investing
A securities broadcast expert introduced a specific steel company, claiming it was extremely undervalued compared to its intrinsic value and expected to rise significantly if held for the mid-to-long term. The stock was around 3,000 won at that time, and although the investor had no initial interest, they bought in when it surged to 6,000 won. Believing the stock was significantly undervalued, they thought it had a long way to go. However, the stock price fell below 5,000 won soon after. The investor contacted the expert, who responded, “It is risky to invest in stocks without knowing that a 100% rise is a time for correction.” This response indicated a lack of understanding of value investing on the expert’s part.
Problems with Long-Term Investing
Those who promote long-term investing claim that investing a small amount now and making an annual return of 30% will yield huge profits in the distant future. However, they do not provide clear guidance on what needs to be done between the present and the future. They simply say to select good stocks and continue to hold them.
Historical Case: The Tylenol Incident
In 1982, six people died in Chicago after taking Tylenol capsules laced with poison. This incident caused Tylenol’s market share to plummet from 37% to 7%, dealing a significant blow to Johnson & Johnson’s sales and corporate image. Johnson & Johnson eventually recovered by switching Tylenol to tablet form and actively communicating with the media. However, if their response had been different or consumer reactions had been poor, investors who trusted Johnson & Johnson’s value and decided on long-term investment would have faced serious losses.
The Realities of Compound Interest and Long-Term Investing
The compound interest effect presented in long-term investing is appealing. But the process requires reinvesting all dividends and profits, exposure to inflation and opportunity costs, and the risk of significant loss. These factors undermine the effectiveness of long-term investing.
The Dilemma of Long-Term Investing: Lessons from Real-Life Cases
One investor shared their story on a securities community board. They invested in a steel company after it was introduced on a securities broadcast, only to see the stock price fall, leading to significant losses. The expert’s response, “A 100% rise is a time for correction,” showed a lack of understanding of value investing.
The Dow Jones Index and Inflation
The Dow Jones started at 100 and surpassed 10,000 in 100 years. This is why Americans promote long-term investing. However, the Dow Jones reached 1,000 for the first time in 1966 but did not surpass it again until 1982. During this period, the US inflation rate increased eightfold, reducing the value of invested money to 13% of its original value.
Lessons from Value Investing and Long-Term Investing
Ultimately, value investing and long-term investing might just be a play on words to attract investors who dislike short-term and long-term investments. Successful stock market investments require accurate information and thorough analysis, and blindly following value or long-term investing strategies can be risky.