Value Investing is a Holistic Approach to Reduce Risk and Long Term Profits

Diversification and Value Hunting have Common Goals

In order to reduce the risk of loss, one can switch over to diversification. Although, the chances of loss can be reduce with the help of a properly diversified portfolio but it can also reduce the prospects of high returns. The risk of loss automatically gets condensed, if a person has an approach of a value investor and he does not need to follow the various schemes of diversification.

Value Investing is a Better Approach

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Holding stocks from different sectors and firms to safeguard the value of a portfolio is the whole essence of diversification. Having stocks in one or two sectors can decimate the value of portfolio. Less chances of risk are involved, when a portfolio spreads out in different sectors. It becomes difficult for a winner to overcome a loser, who has large number of stocks in different sectors.

For an instance, a person held four stocks and the price of one particular stock doubles, while the price of other three remains flat. The situation will not lead to loss but the value of portfolio will be increased by 25%. But, when the value of one stock becomes double in case of 10 stocks, the total return would be 10%, which is better as compare to the value of other portfolio managers. The chances of great returns get diluted, when a person implements the concept of diversification.

However, loss on one or a few stocks will not be much harmful for the portfolio when it holds so many stocks. Nevertheless, the whole idea of diversification is to balance the losses.

Simple Understanding of Value Investing

If someone has an approach like a value investor, he will search out for quality companies which can be purchased at a discount. It is a well accepted fact that buying a company at a discount will reduce the risk of loss. Without accepting widely diversified portfolio, a value investor can reduce the chances of risk. The simple strategy followed by value investors is to buy a few quality stocks at a discount rather than adopting a diversified portfolio strategy, which has its own pitfalls.

In-depth Knowledge is a Must

Value investors consider various aspects of an investment and strive for in-depth understanding about a company including its strengths and weaknesses, before making investment decisions. This approach helps value investors in many ways and they get advantage over those who adopt diversification as a risk reducing strategy. Investors, who have a deep knowledge of about 10 companies, are likely to benefit much more when compared to those who hold 20 or more stocks in their portfolio but do not carry out extensive research on their investments.

Conclusion

Therefore, buying a valuable company at bargain price and having a deep understanding about it can help an investor in decreasing the risk of loss and this scheme is better than owning a widely diversified portfolio. The approach of a value investor to find a quality company helps him achieving the success. In order to reduce the risk, a widely diversified portfolio is requisite but it partly depends on the math of large numbers.

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