Value investing is a strategy where an investor selects stocks with a lower price on the market than their intrinsic value. The father of value investing is considered to be Benjamin Graham, an American investor and economist, who paved the way for this strategy in two of the founding texts in neoclassical investing: Security Analysis (1934) written with David Dodd, and The Intelligent Investor (1949).
What is Value Investing
While we explained the concept of value investing in very simple words above, it doesn’t hurt to quote a more technical description from the site of Nasdaq: "In the context of asset management, mutual funds, and hedge funds, a style of investment that focuses on securities with low price to earnings ratios or low price to book ratios. Some of these securities are deemed cheap and are viewed by manager as having a lot of profit potential."
However, there’s another approach in stock and stock investing, the growth investing. If value investors prefer investing in stocks that seem undervalued by the market, growth investors search for companies with a strong earnings growth. In this case investors buy stocks at a higher price than their value because they belong to companies that demonstrated better-than-average growth.
The 5 fundamentals to value investing
- Companies Have Intrinsic Value. Even if the price of stocks rises and falls, the value doesn’t change. Investors should try to find the moment when the stocks go on sale, to buy them at a lower price.
- Always Have a Margin of Safety. Buying a stock at bargain prices means that in case of bad performance it is less likely you’ll suffer large money losses, while the odds of earning a profit when you sell them later are higher. This principle is called Margin of Safety.
- The Efficient-Market Hypothesis Is Wrong. The Efficient-Market Hypothesis states that stock prices mirror their value, but value investors don’t believe in this theory because prices are also affected by external events.
- Successful Investors Don’t Follow the Herd.Value investors don’t follow trends. They stay away from popular stocks and give a second chance to unpopular ones. When everyone is buying they sell and vice versa. If they are sure about something they keep on doing it regardless of what others say or do.
- Investing Requires Diligence and Patience.Sometimes you’ll decide that you want to invest in a particular company because its fundamentals are sound, but you’ll have to wait because it’s overpriced.
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