Value investing is an investment strategy that involves selecting stocks or other financial assets based on their intrinsic value or fundamental characteristics. The primary goal of value investing is to identify assets that are trading below their intrinsic value and have the potential to generate higher returns over the long term.
The philosophy behind value investing is often associated with Benjamin Graham, who is considered the father of value investing and authored the classic book "The Intelligent Investor." Graham, along with his student Warren Buffett, emphasised the importance of buying undervalued assets and focusing on their fundamental strengths rather than short-term market trends.
Key principles of value investing include:
- Intrinsic value: Value investors believe that each asset has an inherent value, representing its true worth based on factors such as earnings, dividends, assets, and cash flow.
- Margin of safety: Value investors seek to buy assets at a price significantly below their estimated intrinsic value. This provides a cushion against potential errors in valuation and market volatility.
- Long-term perspective: Value investing is generally a long-term strategy. Investors expect the market to eventually recognize the true value of the assets they have chosen, leading to price appreciation over time.
- Fundamental analysis: Value investors conduct extensive fundamental analysis of the assets they consider, looking at financial statements, earnings history, growth potential, management quality, and other relevant factors.
- Contrarian approach: Value investors often go against the prevailing market sentiment. They may purchase assets that are out of favor, experiencing temporary setbacks, or are overlooked by other investors.
- Buy and hold: Value investors typically have a buy-and-hold approach, holding their chosen assets for extended periods, even years, allowing the market to recognise the underlying value.
It's important to note that value investing does not guarantee success, and like any investment strategy, it carries risks. The market may take a considerable amount of time to recognise the value of certain assets, and sometimes the intrinsic value estimate might be incorrect. As with any investment approach, thorough research, diversification, and risk management are essential aspects of value investing.