Value Investing

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History of value investing

The concept of value investing was first lectured by Benjamin Graham and David Dodd at Colombia Business School in 1928 and later developed in 1934 in a text, “Security Analysis.” according to Seth Klarman, value investing is a rejection of the efficient-market hypothesis. In the efficient market ‘hypothesis concept,’ the stocks are valued accurately based on the available data. In contradiction, value investing doesn’t believe accurate valuing of prices with the help of available data, and it also believes there are many non-measurable aspects in evaluating a stock.

What is value investing?

Value investing is often considered the investment paradigm in the investors' community. The concept of value investing involves trading an undermined stock because of inefficiencies in the fundamental analysis. In simpler words, it is investing in stocks by knowing their actual value. Unlike value investing, a typical evaluation of stocks uses metrics and data like Price-to-book, Price-to-earnings, free cash flow, etc.

Value investors think out of the box. They argue that the stocks are sometimes underpriced or overpriced due to various non-measurable aspects.

Example: Bad news on stock will reduce its price irrespective of its performance.

Stocks are purchased, irrespective of their prices, just by understanding the value of the business. Investors purchase expensive stocks because they understand it is important to hold stocks of highly reputed companies. Value investors are lateral thinkers and do not follow the crowd. A typical value investor buys stocks when everyone sells and sells when everyone buys. Value investors buy stocks intending to gain a part of the company's ownership, which is the actual concept behind the stock market. The market volatility doesn’t hurt the value investors as they have good financial principles.

Start-ups sometimes are poorly valued in the beginning when calculated with the available data, turning it into an opportunity for value investors to invest in those stocks which are undermined and left with the unglamorous stock tag. Prices of popular or well-established stocks are very much under the influence of the crowd. YhReading between the lines while reading news about stocks will help commoners to grab the opportunity to invest in some good stocks. Popular stocks are always subject to the news. A single bad statement on a stock can ruin its prices in the market. In a broader sense, a value investor always focuses on long-term aspects of stock, despite the negative news.

Value investing as a strategy.

Value investing itself is considered a strategy, but there are a few strategies that can be followed to execute value investing in its real sense. A company's business model, revenue outcomes, corporate actions, and investor relations are considered in value investing. The above-mentioned aspects help investors predict a stock's growth without having a look at performance stats.

Let us discuss the things that help execute the strategy of value investing.

Promoters attitude

Promoters attitude Promoters are the face of any business or stock, and their presence, attitude, and values towards a business will impact and influence commoners to buy a stock. In the technological world, it is easy for common people to track the actions of promoters. Value investors look at Promoters' behavior, statements, their relation towards investors, and a lot more counts when it comes to value investing. Friendly gestures of the promoters and transparent behavior are highly appreciated by the inventors and make them inclined towards investing in the company. In this case, investors invest in the company because of the bond they have with the company and the promoter.

Analyzing financial statements and earning reports

Analyzing earnings report and financial statements help to know the current status of the stock. Financial statements include the company's net profit, net sales, revenue, debts, profit margin, and free cash flow. The net profit of a company tells the actual profit of the company after the discounts and offers. The net sales of a company reflect actual sales excluding promotions and offers. The net revenue of a company indicates if the company improved from its previous performance. Debts in the financial report indicate the financial stress of the company helps investors to stay away from highly stressed stocks.

Insider trading

Insider trading though it is said to be unethical, it is a legitimate trading method in value investing. Managers, board directors, and shareholders are called the insiders of a company. The advantage of insiders is that they get all the news regarding the stock a bit early when compared to outsiders. Early insights into stocks give an edge to investors, making them stand out from regular investors.

Follow all the corporate actions

Having a track of corporate actions helps investors to know the company’s next move. Value investors are keen observers of promoters, and they look out for their interviews and statements and follow them on social media to grab the opportunity to know things first. Press meets are the events that value investors never miss. A company announces its corporate action: like board decisions, stock splits, dividends, and more in a press meeting.

Couch potato value investing

The couch potato strategy is suggested to those who are not interested in putting effort into fundamental analysis for buying a stock. The couch potato method involves investing in stocks by simply following the analysis of others.

Company reputation

Company reputation plays a key role in influencing investors. Highly reputed companies always stand first in the queue of attractive stocks. Investors like to invest in reputed stocks as their performance, business model, and every action of it is always spoken about among the common crowd.

Customer influence

Customer influence has a key role in stock price fluctuations. Assume a company with a good customer base, customers do all the advertising for the stock through word of mouth. hence, value investors need to know the customers of the business.

Innovation

Businesses that adopt innovations always attract value investors as they are open to new challenges. Investors' communities always search for new businesses with new ideas.

How to calculate the intrinsic value?

While in an interview, Mr. Warren Buffet was asked by an interviewer how to calculate the intrinsic value. Mr. buffet replied, “if we could see any business with its future cash, the inflows or the outflows for few years or until the business is extinct. If it could discount back at the appropriate interest rate would give us an intrinsic value of a company.”

Owners Earnings = EBIT or Operating Profit + Depreciation and Amortization - Capital Expenditure.

Frequently Asked Questions

How do I choose stocks for value investing?

Value stocks are chosen with the help of basic fundamental analysis and non-measurable aspects such as the promoter's attitude and thinking. Value investing is not just number crunching.

Is value investing good for beginners?

Yes. Value investing is good for beginners as it is a long-term profit-making concept. Beginners who cannot afford risk can follow the concept of value investing, but they need to spend time researching some value stocks.