What is Value Investing: There are mainly three popular investment strategies – value investing, growth investing, dividend investing. If anyone asked which one is best for investing, then it is very hard to answer. Every strategy is unique and profitable it depends upon investors’ style, performance, and knowledge.
If you focus on value investing then it is one of the proven methods to create huge wealth. The legend of investing Warren Buffet also implements this strategy. And he also the biggest follower of Value investing.
In 1920 Benjamin Graham invents a new method of investing in stock known as “Value Investing”. Benjamin Graham was American economics, investor, and professor. He is known as the father of “Value Investing” His methods are still applicable today for better returns. His follower like Warren Buffet, Peter Lynch, etc allowed him to develop substantial wealth while minimizing his risk.
What’s Value Investing?
Value investing is an investment strategy that seeks to make a profit from figuring out undervalued shares. It’s primarily based on the concept that every share has intrinsic-value, i.e. what its actual price.
By fundamental-analysis of share, we are able to decide what this intrinsic-value is. The idea in value-investing is to purchase shares that trade at a big low cost to their intrinsic values (i.e. they’re cheaper than their true price). As soon as we purchase an undervalued share, the share value ultimately rises in direction of its intrinsic-value and makes a nice profit for us within the course.
Value investing is basically easy, although requires effort to implement. The analysis process focuses on discovering out the intrinsic value of a share and the first tool for researching share is named fundamental-analysis.
Now understand these bits of value investing thoroughly…
Some Fundamental philosophies
Some time the market will not give you the exact value. It will be overvalued, undervalued, or decent valued at a specific time. It happens due to overreacts of good and bad news. Here we are going to understand three fundamental philosophies of value investing.
To calculate Intrinsic Value
The stock always has a true value or Intrinsic value, either stock will trade below Intrinsic value or above Intrinsic value. This value is calculated by using methods like discounted cash flow. If you are new to the market you can check whether the stock is above or below Intrinsic value by using some portals like “ticker tape”.
Some intelligent investors buy this stock below its intrinsic value and wait till it comes to its true value. In that way, they make a profit, simple.
Avoid following the herd
If any beginner comes into the market he starts to avoid acquiring knowledge. He relies on others’ knowledge and tips. Due to blindly following the crowd he starts losing money. And at an early stage, he exits from the stock market.
If you are a value investor then you should not rely on herd mentality. You should not depend upon group thinking. Always do your own research and always know why you buy this stock.
Focus on margin of safety
Margin of safety always help you to avoid loss and reduce risk. A value investor most of of the time buy stock at margin of safety.
For example, if any stock has Rs 1000 calculated Intrinsic value. Then price below Rs 1000 is termed as an undervalued price. If you want to buy the stock at a 30% margin of safety then you have to buy this stock at Rs 700 or below.
Three important principles
- Do your own research
- Diversify your portfolio
- Always look for safe and steady returns. (Not quick rich schemes)
Some best books to learn Value investing.
Good books are the best way to learning anything. Book reading is a traditional way of learning, it will also help you to learn this concept of investing. I will try to cover some best books here.
The Intelligent Investor Book by Benjamin Graham
The Little Book of Value Investing Book by Christopher H. Browne
Value Investing and behavioral finance Book by Parag Parikh
The Little Book That Beats the Market Book by Joel Greenblatt
The Warren Buffett Way Book by Robert G. Hagstrom