About Value Investing
Value investing is a long-term investment strategy pioneered by Benjamin Graham and popularized by Warren Buffet, the most famous investor in the world and founder of Berkshire Hathaway, the legendary firm with a market capitalization of over $139.4 billion. It's a hands-on strategy that involves highly detailed research of an individual business and determining whether or not its stock price is under or over-valued.
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Significance
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Value investing is far more challenging than most lay investors believe it is. It requires in-depth research into individual companies that goes far beyond merely glancing at the stock-quote fundamentals of the business or reading a few news articles about the management at the company. The primary mission of a value investor is to determine the accurate intrinsic value of a particular company, and then to invest money into it to help it to grow. Ideally, the stock price should soon follow to meet the supposed intrinsic value of the company itself.
Function
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Despite what the linguistic construction of the term might lead you to believe, intrinsic value is entirely subjective. There are no objective methods to accurately value a business and to predict its future profits. Value investors tend to look for stocks and bonds of companies with low debt loads, consistent long term profit growth, high dividend yields and few legal problems. Their time frames are far longer than most investors, often looking for growth in periods over two or three decades.
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Misconceptions
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Many people who admire Warren Buffet and follow his career fail to understand how much effort he and Berkshire Hathaway put into ensuring that their investments pay off. Berkshire Hathaway often takes an active role in the management of the companies that they purchase large stakes in. They may look for undervalued companies, but they also put in a lot of work to make sure that they put into practice methods that will continue to grow profits. For the vast majority of small investors, such an intimately activist approach will be beyond their scope.
Considerations
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As with any investment strategy, the most success comes to those investors who stick to their plans consistently. Ideally, value investors should not be shaken by small movements in a company's price. At the same time, it can be very challenging for such investors to admit when they're wrong and to exit a position of a company that has turned out to have been overvalued rather than undervalued.
Benefits
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An important distinction between value investing and other strategies is that it takes into account the business underlying the stock. Unlike other strategies which really only look at stock prices, value investing is intended to be a more holistic approach towards putting money into the market. As such, it requires more active involvement than the common conception of the strategy might lead people to believe. The critical word in value investing is "value"--investors using this strategy look to buy stocks that they believe are undervalued and sell them when they appear to be overvalued. In a very real sense, their goal is to get the stock performance of a company to correlate as closely as possible with the actual performance of the company itself.
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Resources
- Photo Credit Brewbooks, Flickr
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Comments
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Value Investing is the best strategy. While it protects your capital, the upside potential is quite good in the long term. There are some themes that give you good returns.
