What are high quality investments and how do they work?

Learn more about high quality investments and how this strategy works

High quality investments are an investment strategy based on very well-defined fundamentals.

This investment method focuses mainly on the quality of the shares.

To help you better understand this concept, we have prepared this article. Continue reading and learn all about high quality investing.

What is value investing?

First of all, it is very important that you know what value investing is.

In Portuguese, this term means “value investments”. In practice, it is a method of acting in stock exchange, focusing on stocks that are below their intrinsic price (fair price of a stock).

In other words, it is a long-term strategy whose main objective is to find valuable shares that are being sold for less than they are actually worth.

This strategy was developed by economist Benjamin Graham, one of the greatest investors in history.

Later, the methodology began to be applied by other great investors, such as Warren Buffett and Seth Klarman.

This means that the investor is considering the potential value of a company in the future, not its current value in the financial market.

What are the types of value investing?

Basically, there are two types of value investing:

High quality investments

High Quality, as you already know, is a strategy based on well-defined criteria.

Thus, the methodology aims to identify shares of companies with excellent fundamentals, but which are being traded at a cheap price.

The investor is focused on the quality of the securities.

The qualitative assessment is made based on some criteria, such as management credibility, as well as, obviously, the growth potential of the company in question.

The lower value may be caused by several factors, such as a crisis in the segment in which the company operates, a current management problem or a financial crisis in the country.

It is important to mention that this strategy also takes into account the value of the companies.

The investor hopes that when the situation improves, the company will grow again and bring in profits.

The margin of safety is generally lower than in deep value. However, the possibility of future growth is greater.

Deep Value Investments

Deep Value is also one of the types of value investing.

However, this methodology presents some differences when compared to high quality investments.

After all, in this case, the investor's focus is on finding stocks that are undervalued. This means that in this case, the price of the stocks is the most important factor.

Therefore, the investor does not care as much about information about the company in question and its fundamentals.

In general, deep value acquires shares in companies undergoing liquidation, judicial recovery, among others.

Therefore, when making an investment, one is taking more risks, although obviously, there is the possibility of obtaining good financial returns, even in companies that are close to closing.

What are the principles of value investing?

Value investing is an investment strategy widely used by well-known names in the financial market.

And it is very important that you know the basic principles of this strategy:

Find good companies

Even shares of renowned companies on the market can go through a period of devaluation.

Except for deep value, one of the most important points of the technique is finding companies with good fundamentals.

Therefore, if you do not intend to invest in deep value investing, it is essential that you look for companies with fundamentals to make investments.

Trust

The investor’s confidence in the business is also another point that deserves attention.

And it is important not only to analyze the results, but also to understand the company's processes and management, carry out in-depth research on the company, know who the managers are, among others.

This way, you will trust the organization before you start making applications.

Knowledge to perform analysis

For investors to have confidence, it is also important that they know how to analyze certain fundamentals.

In other words, he needs to understand issues related to corporate administration.

Through fundamental analysis (study of a company's financial, economic and sectoral situation), it becomes easier to identify shares of good companies with potential for appreciation.

Long term vision

Successful investors have a medium to long-term vision.

And the value investing strategy is almost always focused on the long term, as this requires patience and control to deal with market volatility.

Avoid following the herd

The herd effect is basically the tendency to repeat actions done by other people.

But when it comes to investments, the herd effect can often bring losses.

Of course, it is important to follow trends and keep an eye on market news. However, before taking any action, be sure to do your own analysis.

To avoid the herd effect, it is important to have analytical skills and use relevant information to make decisions.

What are the risks of value investing?

Even after understanding the concept of value investing and its types, some investors are still concerned about the risks of this strategy.

First of all, you should know that when compared to other variable income investment methods, value investing can bring a lower risk to the investor.

But this does not mean that risks should be disregarded. On the contrary, the strategy continues to be aimed at investors with a bolder profile, that is, those who have a greater tolerance to risks.

Among the main risks, we can mention economic volatility and instability.

Therefore, before you start investing, pay attention to the analysis methodology and your objectives.

Conclusion

High quality investments are one of the types of value investing.

Investors who want to put this strategy into practice look for shares in companies with good fundamentals, but which for some reason are being sold at a “cheap” price.

As you already know, this modality involves risks. However, the returns can also be satisfactory.