Value Investing focuses on selecting stocks that are undervalued by the stock market in relation to their fundamental strengths and growth potential. The approach was pioneered by Benjamin Graham and David Dodd in the year 1934 in Security Analysis, a book which they co-authored. Well known practitioners of this strategy today include Warren Buffet, and Prem Watsa.
Salient principles
- Assessment of the growth of the company based on the track record of the company and investor estimation of future performance.
- Value investors identify stocks that are being traded at market prices lower than their intrinsic value;
- A margin of safety becomes important because of future uncertainty. Value investors make purchases only if the current market price is at a substantial discount to their evaluation;
- The strategy is built on the understanding that you are not just purchasing a stock, you are investing in the future of a company. A long term horizon is an essential feature of value investing;
- Patience is a key quality in value investing. The price of a stock may double within a year after purchase but staying invested and allowing time for growth and maturity could give even better returns;
Important for Investors
If even painstaking research does not reveal any stock that fits the bill, wait until the right stock shows up on your radar.
