If you want to get better value investing returns, it’s important to focus on stocks that are cheap in relation to earnings, and consider a variety of other investment qualities like years of profit, years of paying dividends, and manageable debt

If you invest in good value stocks and follow our Successful Investor approach, your value investing returns could be much better than you might expect.

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Want better value investing returns? Look for as many as possible of these qualities in value stocks before you buy

• A 5- to 10-year history of profit.
• 5 to 10 years of dividends.
• Freedom from business cycles.
• Industry prominence if not dominance.
• Manageable debt.
• Ownership of strong brand names and an impeccable reputation.

Here’s a strategy for the best value investing returns  

At the core of the Successful Investor approach to strong value investing returns is identifying well-financed companies that are established in their businesses and have a history of earnings and dividends. They are likely to survive any economic setback that comes along, and thrive anew when prosperity returns, as it inevitably does. Value investors have long-term mindsets when it comes to investing.

Long-term wealth building strategies aren’t built by aiming for outsized returns. They are built over time, and most importantly, by learning not to repeat the market mistakes of the past.

In our view, your goal as an investor, particularly if you follow a conservative investing strategy based on our philosophy, is to make an attractive return on your investments over a period of years or decades. That’s with the least amount of risk. Failure means making bad investments that leave you with meagre profits, or losses.

Unsuccessful investors can still make some profits. They just don’t make enough to offset the inevitable losses and leave themselves with an attractive return. A key point to remember is that if you focus on the idea that you never go broke taking a profit, you may be tempted to sell your best investments whenever it seems the investment outlook is clouding over.

Five investment tips for better long-term returns

• Be skeptical.
• Don’t take advice that comes from advisors or institutions selling insurance or other fee-heavy investment/financial products.
• Only buy bonds or other fixed-return investments if interest rates are high enough to be attractive—and they aren’t right now.
• Look for dividends in your investments.
• Understand compounding: It’s a key part of how your personal wealth grows.

Three financial ratios to use when picking value stocks

When you look for stocks that are undervalued, it’s best to focus on shares of quality companies that have a consistent history of sales and earnings, as well as a strong hold on a growing clientele.

High-quality value stocks like these are difficult to find, even when the markets are down. But when you know what stocks to look for, you can discover them. We use three financial ratios as a useful guide and starting point for spotting those stocks:

• Price-sales ratios
• Price-to-earnings ratios
• Price-cash flow ratios

Value investing returns will not come from momentum stocks

Momentum-based investing ignores value investing principles because it involves buying stocks that are going up, particularly in response to earnings reports that beat forecasts. These kinds of criteria are easy to track electronically, so momentum favourites tend to get overpriced quickly. When a momentum favourite reports an unexpected earnings downturn or warning, however, it can drop 25% to 50% instantly.

Other kinds of systems or plans aim to avoid risk in different ways: buying put options to avoid losses on your holdings; or using stop-loss orders to sell falling stocks before they drop too far. Plans like these are surefire ways to generate commission income for your broker. They may cut your risk for a time, but they are even more effective in cutting profit.

The best investment plans or systems use a variation of our value investing approach. That is, they revolve around choosing high-quality investments and diversifying your holdings. Our approach takes that general description a little further. We advise you to invest mainly in well-established companies; focus on companies that are outside the broker/media limelight; and spread your money out across most, if not all, of the five main economic sectors.

Be careful about excessive investing in aggressive stocks if you want higher value investing returns 

Aggressive stocks can give you bigger gains than more conservative stocks. But they also expose you to a greater risk of loss. That’s why we recommend limiting your aggressive holdings to a small part of your overall portfolio.

Ultimately, the percentage of your portfolio that should be held in either conservative or aggressive investments depends on your personal circumstances and risk tolerance—and your own growth investing strategy. An investor with a longer time horizon or without the need for current income from a portfolio can invest somewhat more money in aggressive stocks.

How difficult have you found it to uncover value stocks?