Value investing is an investment strategy that involves choosing stocks that appear to be undervalued, that is that are trading at a price that is less than their intrinsic or asset value. When people ask, ‘How to value invest?’, it means to find stocks that the overall stock market is underestimating for whatever reason – be it market sentiment or simply that the stock is not regarded as valuable for other reasons – and to buy them. The philosophy in value investing is that the stock market overreacts to news and ends up having a disproportionate effect on some stocks that does not correspond to their financial fundamentals, which have otherwise not changed.
The basic premise of How to value invest is relatively easy to understand: if you believe that you know the true value of a stock you can make significant profits when it is trading at a discount to the market price and its fundamental underlying value.
Value investing involves doing research on companies that are undervalued and buying them at discount prices relative to their true value. By buying these stocks at the right time and holding them over the longer term, value investors can make significant profits. Warren Buffet, for example, is a well known example of taking a value investing approach to buying stocks and is regarded as one of the savviest, and richest, stock market investors in the world.
Value investors use various publicly available metrics about a company to decide on the intrinsic value of a company. A company’s intrinsic value is determined by using a combination of financial analysis tools to determine its historical financial performance, revenue, earnings, profit and cash flow as well as more fundamental factors such as the value of its brand, effectiveness of its business model, its target market and penetration and its overall competitive advantage.
Value investors tend to be conservative when making assessments about a given company and will often build in a safety margin that reflects their appetite for risk. This means that they will often only buy stocks in a company when it’s price is significantly below its historical average, other factors being equal, which means that it is truly at a bargain price. Simply for the stock to return to a more reasonable price, given its fundamentals, means that they will make a profit. This risk-averse approach also means that if the company fails to reach its expected price they will lose less money than they might on more speculative stock plays.
