Value investing is one of the most popular trading strategies that teaches fundamental skills that will develop your understanding of the market. This article will cover popular trading investment strategies around fantasy finance.
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Traditional investing can provide many tried and tested strategies that, with a little modification, can be adapted for use in
fantasy contests like StockBattle to secure more wins. Value investing is a widespread and longstanding trading strategy, so how can you apply it to a fantasy trading contest?
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👉What is value investing?
Value investing is one of the most straightforward trading strategies to understand. The goal is to know the actual value of a stock or currency, which is rarely the same as the current
market price.
Knowing this means that when the market price is lower than the actual value, you are getting a discount on the value of that stock. More importantly, you need to know what a stock is worth spotting when those ‘discounts’ are available.
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The main challenge of this strategy is knowing what the actual value of a stock is. For short-term trading and fantasy contests, you can also gain a significant advantage by predicting the undervaluation of stocks so that you can grab them at their best
price.
In practice, these two goals usually work hand in hand simply because you may not know that a stock is being sold below its actual value unless you know what that value is.
Intrinsic value
So how do you go about discovering
the actual value of a stock? This process involves a lot of
price discovery. Conducting a financial analysis of the company is an excellent place to start, and you can start by reviewing their:
However, this only paints half the picture. You will also need to understand how the stock relates to the overall industry. Any knowledge you have about the current landscape of their industry can give you an edge. These considerations can include:
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The company’s brand image and reputation.
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Their business model.
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Their target market.
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How they stack up against competing businesses.
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Upcoming product and service launches.
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Recent changes to their management or leadership.
Graham number
The
Graham number of a stock assesses its value and how far above or below its value the current market price is.
The Graham number represents the upper bound of the price range that an investor should pay. In other words, if the stock price is below the Graham number, then the stock is undervalued and, therefore, a worthwhile investment.
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👉Applying value investing strategy to fantasy trading contests
Value investing is a long-term buy-and-hold strategy in traditional trading. Still, even the longest fantasy contests, such as Investor Fantasy Finance, can last for up to a month. So how do you apply it to fantasy contests like StockBattle?
Using the Graham number
The Graham number method evaluates stocks and assists traditional trading strategies rather than fantasy trading contests. Nonetheless, it is still helpful for fantasy finance players.
Calculating the current Graham number of a stock is one of the simplest ways to work out its undervalued before you start playing a match. Of course, just because an undervalued stock does not mean its price will shoot up throughout your match, and that’s
where good timing comes in.
Timing your matches
In traditional value investment trading, you can buy undervalued stock and wait as long as it takes for the market price to reflect the actual value.
In a timed fantasy trading match, you can’t always do this. There are numerous methods of predicting when a price rise is about to happen on an undervalued stock.
A straightforward method is to pay attention to the spread of information about that company or currency. The stock might be undervalued because the broader market is currently unaware of the company’s fundamental strengths.
When that news reaches beyond the insiders closely following that company, the price can rapidly rise to reflect this. The most famous example of this in recent years is the GameStop situation in January 2021.
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While a short squeeze, it is essential to remember that it is also an extreme example of a value investment strategy.
Reddit users identified that the broader market was not accounting for certain fundamental factors, such as a change in leadership and business model, in addition to the heavily short positions of some hedge funds.
As a result of these factors, the market price did not reflect its actual value but violently overcorrected once news of its undervalued price broke.
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Build a ‘portfolio’ of stocks you follow
Depending on the fantasy trading contest you are playing, you might not build a persistent portfolio within the platform.
For example, in MarketWatch, you can build a simulated portfolio that works the same way as investing real money. Whereas, in StockBattle, you pick a new team of stocks for every match.
However, value investing requires a longer-term understanding of a stock’s current price and actual value. As a result, this approach works best when you focus on stocks and currencies that have meaning to you. Keeping your attention on industries that you
care about and understand as a consumer makes it much easier to predict the impact of company news.
Just as importantly, it means you will have an accurate read on the landscape. You’ll know what their competitors are up to and how that will impact the market and the stocks you follow.
Build a ‘portfolio’ of stocks that you can fully understand and stay updated on their latest news so that you always know their actual value. Then when it is time to play a match, you can pick out the most undervalued stocks in that list to place on your
team.
So how do you do that?
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Follow the news: Besides news sources specific to the industry you are following, financial news sources like Yahoo Finances can give you information about a company’s management or finances that other news sources don’t cover.
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Look for spikes in trading volume: This can signify that the market has recognized an undervalued stock and started buying. Look into what the market makers and takers are doing.
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Wait for trade events and announcements: That draws more comprehensive attention to a company, creating more interest in their stock.
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Summing up
Value investing is an excellent strategy for people looking to apply traditional trading tactics to their fantasy finance. The skills and habits you develop in assessing undervalued stocks and currencies are invaluable not just for playing with a value investing
strategy.
Still, it can provide a better foundation of knowledge from which to attempt more complex approaches.