Value Investing is seen by many as a form of “smart investing”, as it is in many ways the polar opposite of speculation and impulse buying (or selling). The reputation of value investing has been polished by its association with legendary investor Warren Buffett. Buffett, however, has refined the original concept of value investing from investing in average companies selling at a bargain prices to “finding an outstanding company at a sensible price”.
Value investing as an investment strategy was first spelt out by noted economist Benjamin Graham, often referred to as “The Father of Value Investing” and the “Dean of Wall Street”. Graham, who died in 1976, published extremely influential books in 1934 (Security Analysis) and 1949 (The Intelligent Investor) that spelt out the concept of value investing and positioned it as the antithesis of speculation. In doing so, he restored a good portion of the tarnished luster equities investing in general had suffered as a result of the 1929 stock market crash and ensuing Great Depression.
Graham asked investors who purchase stock to consider themselves to be owners of that particular company, not casual traders who treat the stock market like a “voting machine”. Rather, the value investor analyzes each company and should the business fundamentals seem promising, only then make an investment in the company by purchasing stock. Needless to say, such an investment would be for the long term, or at least until business conditions within the company and/or the wider economy change those once-promising fundamentals.
Today’s value investors look at each company from an analytical point of view and ensure that certain conditions are in pace before making their investment. Some of the factors that make a stock a good candidate for value investing are a low P/E (price to earnings) ratio, a high dividend yield or generally positive health epitomized by low or no debts. Such companies may then be said to be undervalued, and as such should, over the medium to long term, rise to meet their “actual” values. When that happens, the value investor takes his/her profit and looks for the next undervalued company to invest in.
Although many investors do not have the patience nor the knowledge needed to be successful value investors, those that do have in general been very successful over the long term. After all, one certainly cannot argue with Warren Buffet’s record of success as a leading value investor!
Happy investing Guys!!