Value investors seek to buy shares that are cheap relative to their assets or earnings. The aim is to discover businesses with share prices at a discount – relative to their true worth – hoping that their full value will be realised in time. By targeting generally ignored areas of the market, value investors look to find unappreciated bargains.
The Origins of Value Investing
Value investing was developed in 1934 from a concept by Columbia Business School professors David Dodd and Benjamin Graham and popularised by The Intelligent Investor published by Graham in 1949. Subsequent studies have consistently found that, over the long term, value stocks outperform the market and growth stocks, with value investors typically working to identify stocks they think are being underestimated.
Building a Margin of Safety
Those with experience in this field, such as Ben Waters, trader, understand that incorporating a margin of safety into their investments is often a strategy followed by value investors. This margin allows for a level of error in value estimation and is based on the investor’s individual risk tolerance. One of the keys to successful value investing, the margin of safety principle is based on the idea that buying stocks at a cheap price gives investors a better chance of making a profit when they’re sold later. If the stock fails to perform as expected, the margin makes it less likely an investor will lose money.
Intrinsic Value
The aim of value investing is to profit from shares that the investor believes are deeply discounted due to market undervaluation. To determine the intrinsic value of a stock, investors deploy a range of metrics. These include financial analyses and assessing things like the company’s business model, brand, competitive advantage and target audience. Value investors also often consider a business’s sales, debt, equity and revenue growth when deciding whether to purchase shares.
Contributing to a Balanced Portfolio
Value investors like Benjamin Waters, trader, know that a balanced portfolio can be an effective means to hedge against risk. When building such a portfolio, it’s usually advisable to take a long-term view and be broad minded about a wide range of investment strategies. This also takes into account the fact that different investing styles may work at different times, with the tide of sentiment sometimes overcoming even tried-and-testing strategies, especially in the short term.
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