Value investing is an investment strategy where shares are selected for purchase that trade for less than their calculated or intrinsic value.
To value invest an investor needs to understand thoroughly the share or business they are investing in, to arrive at a calculated or (intrinsic) value and then buy the shares at LESS than what they calculate as their intrinsic value.
It is an investment technique that has proven itself consistently over time and a way of investing that attempts to gain greater than index market returns for a lower level of risk over the long term.
Value investors actively seek shares they believe the market has undervalued. Investors who use this strategy believe the market overreacts to good and bad news, resulting in share price movements that do not correspond with a company’s long-term fundamentals, giving an opportunity to buy when the price is deflated and sell when over inflated.
However, calculating or estimating the intrinsic value of a stock is difficult. Two investors can be given the exact same information and place a different value on a company. For this reason, another central concept of value investing is that of “margin of safety.” Value investors need to buy an equity at a big enough discount to allow some room for error in the estimation of value.
Additionally, value investing is subjective. Value investors utilise different methodologies, some only look at current asset values and earnings and do not place any value on future growth. Others base their valuation methods on the estimation of future growth and cash flows along with the maintenance of a durable competitive advantage or “moat” around the business to protect against competitors.
While different methodologies are used, the underlying premise is a value investor should buy something for less than he thinks it is currently worth utilising a reliable solid valuation method and applying a margin of safety.
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