3 Reasons to Add Value Stocks to Your Portfolio

Introduction

There are three reasons that you should add value stocks to your portfolio. One reason is that you can purchase the stock at a discount. Another reason is that you don't have to pay a lot of commission fees, and a third reason is that you can make a lot of money. However, before I elaborate about these points, let me raise the question, just what is a value stock? A value stock is a stock that investors believe is selling below its actual value. For example, during the recession of 2008, many stocks were selling far below their real value. In fact, you could pick up good companies for nickels and dimes, so to speak. A case in point is the company that I work for: United Airlines that trades on the NASDAQ stock exchange under the symbol of UAUA. That stock was trading at times as low as $5.00 a share. Today it is trading for $21.95. Another stock that I actually bought but sold too early was AIG. During the height of the 2008 recession, it was selling as low as $0.99 a share, the price at which I bought it. I bought 1000 shares. Today, it is trading at $35.30 a share.

You can buy stocks at a discount

This leads me to my first reason that you should add value stock to your portfolio. You should buy value stocks because you can get good companies at a discount. In other words, instead of paying full price for a stock, you get it at a price that is below--and sometimes far below--its actual worth. Would you rather have bought UAL as a value stock at $5.00 rather than its present market value of $21.95? Also, would you have rather bought AIG at its steep discounted price of $1 a share rather than its present value of $35.30? Presently, British Petroleum (BP) is receiving a lot of bad press, and I might add, rightly so. Notwithstanding that, a lot of value investor see it as a value stock because they believe that it is selling below--about 50% below its actual value. Not too long ago, it was hovering around $60.00 a share. And only a few days ago, it dipped below $30.00 a share. Today, as I am composing this hub, it is trading at $32.78 a share. After the dust settles, many believe--and I do too--it will rebound to its true intrinsic value far above its current market rate.

You can do business at a low cost

A second reason that you should add value stocks to your portfolio is that your cost of doing business is low. That is to say that you won't be hit with a lot of commission fees. You will, at most, have to pay either one or two commissions to a broker. First, you will have to pay a commission when you buy the stock. And this might be the only commission fee that you pay if you decide to follow Warren Buffett and hold on to your investment for life. On the other hand, if you decide that you want to lock in your profit and sell the security (i.e. stock), then you will have to pay a second commission fee. Why? Because each time you sell shares in the same way that each time you buy stocks, you have to pay a commission. On the other side, if you were a trader jumping in and out of stocks, you would have to pay a lot of your investment money in commission fees. Let's us say that you are paying a commission of $10.00 for every trade you make. If you bought a stock and held on to it for life, the cost of doing business would be only $10.00. On the other hand, if you jumped in and out of 10 stocks, your expense would come to $200.00 (10 buys at $10 = $100; 10 sells at $10 = $100).

You can make a whole lot of money

Third and last, you should buy value stocks simply and perhaps most importantly because you can potentially make a whole pile of money. Let me go back to my earlier example of AIG. During the recession of 2008, I asked my wife if I could take out a loan from our 401k plan and invest it in the market. My goal was to bet the barn and put it all on AIG, which at the time was selling for under $1.65. When I bought it, it was selling for under a dollar at $0.99 a share. Knowing that I was handling family money, I decided to play it safe and invest only $1000 in AIG. If it were my own money, I would have had the entire $5000 riding on AIG, but when you are dealing with other people's money, its a whole new ball game. Ask any Turtle. I could have lost the entire $5000 had AIG bellied-up. How would I have explained this to my wife? I would dreaded to see the look on her face if I had to tell her that I had lost our entire $5000 in the market overnight. So I, again, took the conservative route, and diversified the funds from the 401k plan. As history would have it, AIG did not belly up. Rather it survived, and is selling today to the tune of $35.30. This leads me back to my original point: That you can make a whole heap of money by investing in value stocks! Suppose I had stuck to my initial plan of investing all of the $5000 in AIG and bought 5000 share at about $1 a share, I would today be sitting on a nice nest egg of about $175,000!

Recapitulation

To recap: You should seriously think about adding value stocks to your portfolio, again, for the following reasons: One: You can buy good companies at great (i.e. discounted) prices. Two: Your cost of doing business would be low. And three: You can stand to make a whole lot--and I mean a whole lot--of money!