Stock markets are known to behave in their own unique manner. Stock prices change on sentiments, demand and also on global factors. Price fluctuations
can be seen even when there is no change in the company’s value or its valuations.
That is where value investing plays its role. The basic notion behind value investing is simple. If you know the true value of something, you can save a lot of money when you buy it on sale. Everybody knows that whether you buy a new TV on sale, or at full price, you’re getting the same TV with the same screen size and picture quality.
Value investing is an investment strategy that involves picking stocks that appear to be trading for less than their intrinsic or book value. Value investors look for stocks they think the stock market is underestimating.
Growth and value investing are two different approaches to stock investing. While growth investors are seeking companies on the basis of their growth potential, the companies that offer strong earnings growth, Value investors look for stocks that are discounted or undervalued in the market.
The best-known value investor today and a role model of value investing is Berkshire Hathaway Chairman Warren Buffet. His mentor, Benjamin Graham is considered the godfather of value investing and introduced the idea of intrinsic value, the underlying fair value of a stock based on its future earning power.
Investors use different methods to find the valuation of intrinsic value of a stock. To ascertain the intrinsic value they take into account the Company’s financials as well as its fundamentals. Other common metrics used to evaluate a company’s stock include Price-to-Book Ratio, Price-to-Earnings Ratio, Debt-to-Equity, and Free Cash Flow. There are many other metrics used in the analysis, including analyzing debt, equity, sales, and revenue growth.
Value investors have a mind of their own. They mostly act different than the crowd and often take a contrarian view. Many value investors have struck gold, buying; when the world was panic selling and when everyone is buying they are at the sidelines or selling.
Value investing is a form of art than science. It requires subjectivity layered with patience.
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