Value Investing

What is Value Investing?

It is a method of stock trading, where in investment is made in undervalued companies which have high intrinsic value.

This is a long term, buy and hold method of investment, based on fundamental analysis.

Investing in valuable stocks was established by Benjamin Graham and David Dodd. Both were professors at Columbia Business School. Many famous investors like Warren Buffett, are their students. Benjamin Graham introduced the important concept of margin of safety, in his book Security Analysis, which is coauthored by David Dodd.

Graham in his book The Intelligent Investor, recommends defensive investment, which involves investing in stocks, trading below their tangible book value, as a safeguard to adverse future developments often encountered in the stock market. The discount of the market price to the intrinsic value is what Benjamin Graham called the "margin of safety". The intrinsic value is the discounted value of all future distributions.

However, the future distributions and the appropriate discount rate can only be assumptions. Warren Buffett has taken this concept of investing in value stocks even further, by focusing on "finding an outstanding company at a sensible price" rather than generic companies at a bargain price.

The point is to find a good company which has high return on capital and high earnings yield, and buy them at bargain price. In other words buy undervalued companies which have high intrinsic value.

This point is very humorously simplified in “The Little Book That Beats the Market” written by Joel Greenblatt.

I also suggest you to read, The Intelligent Investor: The Definitive Book on Value Investing. A Book of Practical Counsel (Revised Edition) by Benjamin Graham, Jason Zweig, and Warren E. Buffett. 

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