Value Investing – Definition, Strategies, Risks, Benefits, Example & more
Investors who have a view of investing on long terms basis, and have a complete unique set of strategies they follow, opt for Value Investing.
Such investors are more of their own leaders, where they follow specific financial analysis to sketch out the quality companies.
They plan on investing with specific companies, which possess the capability of performing exceptionally well, and would yield them higher than usual returns in future.
Such investors do not follow which stocks are trending or the already highly established companies. They have their specific agendas they stick to.
What is Value Investing?
Drawing out the exact definition of Value Investing, it is merely a strategy adopted to target specific shares, with a view to invest on them.
In this strategy, the investors study and attempt a routine analysis to check out the stocks. The ones which have a low market value, but have a high book value.
Such investors are always in an attempt to mine out the stocks, which are trading at prices lower than their capability.
Value investing India is all about considering the recent fluctuations of the prices, upon frequent turn of events, which does not come out to be in favour of the long term hold of a company.
About Value Investing & History of Value Investing
Benjamin Graham is the author of value investing, and also the father of value investing. He invented the strategy for the average investors.
Where, he defined how high valued companies operating at lower prices were the best option to go from, following the market crash in the great depression.
He went on to author a book “Security Analysis” defining a methodology of investment, the method of which went on to be known as Value Investing from Graham.
This was later on acquired by Warren Buffet, the founder and CEO of Berkshire Hathaway, who was also a student of Graham.
Buffet, went on to define the strategy and got people driven by the aphorism like “It is much better to buy a wonderful company at a fair price than a fair company at a wonderful price”.
Value Investing from Buffet is all about looking for stocks which have a lower market value, trading at prices lesser that their book value.
Value Investing Strategies
Some of the Value Investing Strategies are listed below.
- In this strategy, an investor would mine out the future financial position of a company, and discount the cash flows from future, in respect with weighted average of cost of equity and debt.
- The next strategy is oriented towards, dividend payout, rather than cash flow, i.e. it derives an intrinsic value.
- Also, investors take in account some assets of the company which are at present undervalued or are not properly stated in the books of account. The examples are land and intellectual properties.
How Value Investing Works?
Value investing and Behavioral Finance is all about finding the right moments as that of a sale.
Buying the same with respect to reduced prices, to make likewise return, when full potential of the company is reached.
Going easy on the explanation, one would consider it profitable to buy products when they are on sale.
They believe with the notion which states that, when you get the same product, with the similar quality, characteristics and features, why buy it at exceptionally high prices.
A similar fashion is witnessed with stocks, where the value of the stock is same, but the market price changes. One such reason of fluctuation in price is the demand.
When demand decreases, the stock value decreases too, although the value from the product is enjoyed at the maximum.
So, value investing is all about discovering the real value of stock. While closely monitoring their sales, in order to make the best discounted buy.
As stock prices aren’t advertised, like general commodities when they go on sale. Investors need to do their part of homework, to be able to buy shares; lesser the value market weighs them at.
Risk with Value Investing
Just like any other investment strategy, there exist fine share of Value Investing Risk. Yes, this strategy is of low to medium risk in nature, but this does not render fully guarantee of being risk free.
Here are some of the risks associated with it:
- Value investors generally perform their individual research and then, invest according to it. There can be instances in such cases, when the information researched upon may be outdated. Thereby resulting in an outdated financial analysis.
- There are certain extraordinary events, which do not lie in the hands of the company, or are controllable by the company. Brief analysis, not being attempted on the extraordinary losses or extraordinary items of the company, may lead to the negative investment strategies.
- Ratio analysis being conducted can actually have a number of flaws the investors need to know of. For instance, comparing companies based on the ratios they release may not be appropriate. As there might be possibility of different accounting practices adopted by both the company. That are not comparable in nature, and if done would portray a false result.
On the contrary, stocks when bought at higher prices, than their initial value are deemed to high losses.
- Investing merely on the basis of value investing, without diversifying.
Examples of Value Investing
One of the Value Investing Examples which can be looked upon is of the Fitbit stock.
It was when the company released its quarter earnings from the year of 2016, in the month of May, that the share prices went down at the hours of trading.
It reached a point of time, when the company lost merely 19% of the value it possess. This generally happen a lot of times.
When companies release their quarter earnings, following which Fitbit stood grounded to the analyst expectations and increased its guidance for remaining portion of the year.
Fitbit had revenue of $505.4 million for the first quarter, and this was expected to increase in the next quarter of the year.
But then, the company invested a high proportion of its revenue into research activities. This led to the downfall of its demand and the investors began selling off the shares they have.
This is exactly where value investors jump in, as they know the potential of the company. It would outperform the present valuation in market, in future.
Hence, then invest in stock at such time, only to get high returns in the future, thereby being long term investment oriented.
Best Value Investing Books
The highly benefiting Value Investing Books which can be bought, to get familiar with the concept are based on the most popular vale investor: Warren Buffett.
- The Snowball: Warren Buffett and the Business of Life
- Buffett: The Making of an American Capitalist
Value Investing – Conclusion
If you are drawn by the idea of value investing, we are sure this article will be your takeaway of the basics on Value investing.
For a beginner, we constructed this article to touch every essential points and aspects of the investment strategies. This article would have taken you a step closer to incorporating the strategy.
Value Investing FAQs
Ques – What is value investing?
Answer – Value investing is just a strategy adopted to target specific shares with a view to invest in them. Investors study and make a routine evaluation to check out the stocks which have a low market value but high book value. Such investors are always looking for a time to mine out the stocks that are trading at prices lower than their potentiality.
Ques – What is the history of value investing?
Answer – Benjamin Graham is the author of value investing. He invented the entire strategy for average investors. Here, he explained how high valued companies operating at extremely low prices were the best option to go from. He went ahead to write another book named security analysis where he defined a method of investment which was known as value investing from Graham. This was later acquired by Warren Buffett, the founder and CEO of Berkshire Hathaway. He then went on to explain the strategy and got people extremely motivated with the quote“ It is much better to buy a wonderful company at a fair price than a fair company at a wonderful price.”
Ques – What are the strategies involved in value investing?
Answer – In the strategy involving value investing, the investor would figure out the future financial position of a company and discount the cash flows from future as far as the average of cost of equity and debt is concerned. The next strategy is concerned with the dividend payout and derives and intrinsic value. Investors take some assets of the company into account which are usually undervalued at that moment.
Ques – What are the benefits of value investing?
Answer – It is extremely profitable to buy products when they are on sale because when you get the same product with a similar quality and features at a low price, why invest more money at all? In the stock market world, when the value of a stock is same but the market price changes, similar fashion is experienced. Here comes value investing in its entirety. It is all about discovering the real value of a particular stock. Investors need to do their part of the homework to be able to buy shares with lesser value but with a margin of enormous profit.
Ques – What are the risks involved in value investing?
Answer – Some events do not lie in the hands of the company but on the hands of the investor which he can’t control at all times. Such instances would be brief analysis, extraordinary losses, so on and so forth that might lead to negative investment strategies. Stocks when brought at higher prices than their initial value are deemed to high losses. Ratio and Analysis are conducted and that can have a number of flaws which investor need to know. Comparing the companies based on this ratio may not be absolutely appropriate because there might be a possibility of different accounting practises.
Ques – What are the best books for value investing?
Answer – The Snowball: Warren Buffett and the Business of Life.
Buffet: The Making of an American Capitalist.
Ques – Can anyone do value investing?
Answer – Even beginners can do value investing for that matter. It focuses on buying undervalued stock of extremely strong companies and holding them for a long period of time. Before you start value investing, you need to understand the basics of it and why it has been a success for over so many years. Nevertheless, you should never allocate more than 10% of your investment portfolio to individual stock picking.
Ques – Who is the author of value investing?
Answer – Value investing was basically developed in the 1920s by Benjamin Graham and finance professor David Dodd. They were co-authors of the classic text named security analysis and are regarded as the pioneers of this field. They both hailed from the Columbia business school.
Ques – How Value Investing Works?
Answer – Value investing is all about finding the right moment as that of a sale. Buying the same share with respect to extremely low prices to make likewise returns when the company has reached its full potential is a very smart move to make. It is considered extremely profitable to buy products when they’re on sale and so goes the explanation with shares in the stock market world. The market price changes and one of the reasons is the demand. When demand decreases, the stock value decreases too and vice versa. So, value investing is all about discovering the real value of a stock.
Ques – What are the tips for value investing?
Answer – When Warren Buffett started investing, it was with this principle that he made small initial investment into a large fortune which he is the owner of, today. It is certainly safe to say that value investing has the capacity to gain you a lot of profit. Having said that, a few tips for value investing are mentioned below:
- Buy Businesses, not stocks.
- Love the business that you buy.
- Invest in companies whose policy you understand.
- Don’t stress a lot over the entire concept of diversification.
- Ignore the market majority of the time.
