What is value investing?

What is value investing?

Value investing is an important investment paradigm that comes from investment ideas that Benjamin Graham preached. Value investing generally involves buying stocks which appear underpriced by some form of fundamental analysis, i.e. an analysis of the fundamentals of a company. For instance, one might look for indicators of an excellent company (or stock) such as discounts to book value, net asset value, dividend returns, low price-earning ratios (PE ratios), or the like.

Proponents of value investing, especially my favourite Warren Buffett, have argued that the essence of value investing is buying stocks at less than their intrinsic value. This discount of market price to value is called the "margin of safety". Simply put, the price is right if what you pay is lower than the value that you are getting for that price. Margin of safety has to do with both price and value, and that difference is the margin; the bigger the margin of safety, the better.

However, fundamental analysis is not as simple as it seems. Again, Buffett has taken the value investing concept even further and his focus has been basically on "finding an outstanding company at a sensible price". He has made a lot of money using value investing, becoming a billionaire in his outstanding career. I am a fan of Buffett and will be revisiting him in later posts here in this blog, as I consider him a role model.