Value Investing, Value Investor

November 23, 2010Investingby EconomyWatch

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Value investing involves buying an undervalued stock and selling it when the market finally recognizes thecompany’s potential. Value investing can be simply understood as investing in something that the market currently values less than what it is actually worth. The concept of “value” may be different for different investors. While some of them consider only the present assets of a company to determine the intrinsic value of its share, others base their estimation entirely on the company’s growth prospects.

Value investing is a style or profile of investing that was innovated by Benjamin Graham and David Dodd in their famous work ‘Security Analysis.’ This book was first published in 1934. Among the well known proponents of the concept of value investing isWarren Buffett, the renowned investor and chairman of Berkshire Hathaway. Warren Buffett has contributed to the value investing concept by propounding the idea of “finding an outstanding company at a sensible price.”

How is Value Investing Done?

Value investing generally involves the buying of under-priced shares. Whether the share is under priced or not is establishedby some forms of fundamental analysis. Examples of such under priced securities include stocks having:

  • High dividend yields.
  • Low price-to-earnings multiples.
  • Low price-to-book ratios.

Also, stocks trading at a discount to their book value can be considered value investments. Other strategies include opting for stocks with low price-to-cash-flow ratios. There are many ways of evaluating the success of value investing. One could indulgein value investing by observing the strategies of well known investors.

Benefits and Dangers of Value Investing

The ability to select a company with strong fundamentals can earn gains in the long run.

It has been empirically observed that value stocks outperform growth stocks. By compounding through dividends, they can be among the most profitable investment options in one’s portfolio. However, given the huge number of companies that float theirshares in the market, it becomes extremely difficult to find a stock of a promising company that is undervalued by the market.

Besides, over dependence on the paradigm of value investing can minimize one’s earnings potential. It is important that investors take investor sentiment into account, as this plays a crucial role in the movement of stock prices in the market.

 

 

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