HOW VALUE STOCK INVESTMENT WORKS

Value investing is an investment pattern or model that involves buying stocks or securities that appear underpriced. The various forms of value investing are derived from the investment philosophy first taught by Benjamin Graham and David Dodd at Columbia Business School in 1928, and subsequently developed in their text in 1934. Several reports say Graham never used the phrase, "value investing." The term was coined later to help describe his ideas and has resulted in significant misinterpretation of his principles, the foremost being that Graham simply recommended cheap stocks.

You can save some cash by buying a good on sale, provided you know the value of such good. However, people believe that whether you buy a new smartphone on sale, or at full price, you would be getting the same phone with the same screen and camera quality. Stocks follow a similar pattern, that is, a company’s stock price can change even when the company’s value has remained the same. In the stock market, for a stock to be classified as being cheap or discounted is when its shares are undervalued. Value investors often expect to profit from shares they perceive to be deeply discounted.

Investors make use of various metrics to find the intrinsic value of a stock. Intrinsic value is a combination of using financial analysis such as studying a company's financial performance, revenue, earnings, cash flow, and profit as well as fundamental factors, including the company's brand, business model, target market, and competitive advantage

Some of the metrics used include price-to-earnings (which tracks the company's earnings to know if the stock price is undervalued), price-to-book (which measures the value of a company's assets and compares them to stock price), free cash flow (the cash generated from a company's revenue after the expenditure has been subtracted) and several others.

Value investors require some room for error in their estimation of value and often set their own "margin of safety," based on their particular risk tolerance. The margin of safety principle is based on the premise that buying stocks at bargain prices give better chances at earning a profit later when sold. The margin of safety minimizes money loss if stocks do not perform as expected.

Value investors don’t believe in the hypothesis of "efficient market," which says that stock prices already take all information about a company into account, so their price always reflects their value. Instead, value investors believe that stocks may be over- or underpriced for a variety of reasons.

Trending in the path of value investment

You probably are into value investing if your ultimate investing goal is to keep your risk of permanent losses at an absolute minimum while increasing your chances of generating positive returns. Generally, value investing requires more time to research stocks in order to measure a company's intrinsic value to determine if there's a big enough margin of safety.

 

 

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