What Is Value Investing?
Value investing is a series of doctrines introduced by Benjamin Graham in the year 1934 after writing the Security Analysis book. It involves the act of purchasing stocks that are already out of favor in the stock market because of the irrationality of investor. The said irrationality is too extreme that it is capable of pushing the price of a stock way below its actual value.
A wise value investor is someone who knows exactly the actual value of the stocks despite the changes on its value due to the irrationality. A lot of key concepts and principles that support and strengthen the mindset of wise value investors are included in the doctrines introduced by Graham. One of these principles is that if you are a value investor, you have to take the perspectives of the business owner when trying to analyze the value and the performance of a specific company. This will allow you to detect any vital information that will be useful in accurately assessing value.
Another vital principle is that as a value investor, you should have the ability to count and determine market irrationality within a short-term period. Both of these principles are extremely useful when it comes to evaluating all the out of favor stocks that are available for purchase. Aside from the principles mentioned above, additional doctrines should also be followed to make sure that the value investing process is successfully carried out. One of the additional doctrines that a value investor needs to follow especially when it comes to identifying margin of safety and the intrinsic value of a stock is to make a perception that the stock market has brought down the value of the stock irrationally.
It is also important for you to think that the price is not in any way related to the actual net value of the asset or worth of the stock. If you are a value investor, then another principle which you should consider following is to identify the intrinsic value of the stock by producing various estimates based on the formulas that you use in calculating it. Margin of safety which refers to the sufficiently undervalued stock designed to help traders deal with any market downturns or uncertainties should also be determined. It is important for you to figure out if the results of your valuation and analysis prove that your investments will be worthwhile.
As a value investor, you should know that your success will be fully dependent on the accuracy of your answers on simple questions like what is the real value of a specific company and if whether the actual intrinsic value is lesser than the total purchase price of the shares. You should also prepare yourself for the inherent volatility of the market and the significant fluctuation in stock prices. In order for you to effectively carry out the typical value investing process, note that you have to follow a specific format. As an effective value investor, you have to first set up the criteria and standards for stock picks, obtain ideas for investment from stock screen, execute a more detailed analysis of the financial performance of a company and its stocks, assess the business and its earning potential and create a portfolio.
by: William WL Tan