What is value investing? What do we mean by value investing?
Value investing means buying something for less than it is valued at. The difficulty is in calculating the value of the thing in which you are investing. Benjamin Graham defines an investment operation as one which, upon thorough analysis promises safety of principal and an adequate return. Operations not meeting these requirements are speculative.
Benjamin Graham is the ‘father of value investing’
It was Benjamin Graham who applied to the theory of investing the concept of intrinsic value. According to Graham, if you can determine the intrinsic value of a share, then you can ascribe to that share a real value that is not dependent upon the opinion of others. If you can then buy that share at a price less than its intrinsic value, giving yourself a satisfactory margin of safety and may make an investmentt. An investor who makes purchases of common stock like he is purchasing interests of a business in the private market will come ahead in the long run.
Buying shares on the basis of value is investing. Buying shares on other bases such as the belief that the market will rise generally, or that a particular industry is good, or that others will bid the price up, is not investment but speculation.
Graham’s basic principles of value investing
In The Intelligent Investor, Graham sets out his strategies for making investments based on value for various types of investor – passive and active, defensive and enterprising investors.
- When you buy a stock, you are buying a share in a business.
- The market price of a stock is only an opinion of the value of the stock and does not necessarily reflect the real value of that stock.
- An investor must always build a margin of safety into the decision to buy a stock.
- Intelligent Investing requires a detached and long term approach, based on careful research and reason, and not on the opinions of others or the prospects of short term gains.
Warren Buffett and Value Investing Beyond Graham
“It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”
The concept of a value and learning to identify is a part of the process of learning to invest.
Buffett sums up value investing
When Buffett was asked to explain his investment strategy, the words that he used essentially reflect the essence of value investing: look at a stock, assess its value, work out a price that you can pay for it with a minimum of risk, wait patiently for that price and then buy in when you can.
Invest in equities slowly over time … And look to buy companies that will go on forever like Coca Cola … but the key is to buy equities slowly over time and don’t try to time the market. For the more serious investor, buy equities strategically, opportunistically. -Warren Buffett