A well-calculated, studied move in the investment sphere helps to yield positive results and consequently, makes ones deal lucrative in the long run. In general, there are numerous approaches that are followed while making an investment decision. Value investing is one of the most used approaches by investors. Under the value investing approach, there is another popular term called deep value investing.
Deep value investing is an extreme version of value investing wherein stocks are procured at a higher discount rate in contrast to its actual market value. Consequently, the possibility of reward as well as the risks associated with the investment increases. This approach is often deployed by investors. For instance, renowned investor, Warren Buffett uses value investing techniques and assesses investment decisions. By employing this technique, Buffett presently owns shares in prominent companies like Apple ( owns 25.79 per cent stakes), Bank of America (owns 29.2 per cent stakes) and Coca-Cola (owns 9.4 per cent stakes).
A Search to find a Good, Sustainable Business
Even after employing different investment approaches, investors dont primarily follow investment lessons to find a good company. Besides gauging a companys value, the investors in the first place look for a companys reputation in the market; what kind of influence the company has over consumers; and then the idea of investing or not investing in the company is considered. This practice has commonly taken place in the business ecosystem.
During Americas stock market crash of 1987, stocks of the famous beverage company, Coca Cola drastically depreciated along with other companies. Warren Buffett looked it as a golden opportunity and thus, procured shares worth $1 Billion of Coca Cola. With this, Buffetts stakeholding reached 6.2 per cent within the beverage company.
This instance shows that Buffett deployed deep value investing approach but he first assessed the beverage companys market presence and prominence amongst consumers.
Coca-Cola's iconic name and global reach created a moat around its core soft drink product, so Buffett did not have to worry about a competitor would come and take away its market share, according to Investopedia.
Why is it Important to Make Bets on Big Companies?
Big companies become renowned in the market because of an unusual business strategy or business model they introduce. Owing to which, they create a market for themselves effortlessly and receive the tag of a big company.
Besides this, there are various other reasons that make an investment in big companies can be profitable.
While planning to invest in a company, it is of prime importance to ascertain if the company offers a high ROE. An investor needs to track ROE returns that the company offered in the past.
Once the investor finds out about investment returns of a particular company, the next step is to test the business model and the companys product. An investor has to ascertain how many competitors a company has in the industry; how much revenue the company churns out from the space, and so on.
The aforementioned reasons state how investing in big companies can be profitable.