Investment is becoming a challenging task with each passing day, thanks to the global stock market’s persistent inconstancy on political or economic factors. While President Donald Trump’s first budget blue print has started to create quite a stir within the investment world, it is always wise to rely on tried and trusted strategies.
As per a Forbes article, shares of Berkshire Hathaway, owned by the world’s most successful value investor Warren Buffett, increased 20% in 2016, boosting the Oracle of Omaha’s personal fortune by $12.3 billion (more than any other billionaire in the U.S.) to $74.2 billion. This once again underscores the importance of value investing as the most tempting strategy to bet on even amid capricious market conditions.
Buffett believes that proper understanding of the “intrinsic value” of a stock may ease out many problems with regard to value investment. According to him, going by the fundamentals of value investing, while picking undervalued stocks, we also need to focus on their earnings growth potential.
While yardsticks such as dividend yield, the ratio of price to earnings, sales or book value are the most common value investing matrices that can easily single out stocks trading at a discount, these ratios fail to consider the potential of a stock. PEG is the ratio with the earnings growth component in it.