Will The Real Value Investor Please Stand Up? by George Athanassakos, The Globe And Mail
While Ben Graham is considered to be the father of value investing, Warren Buffett has popularized it and made it known to the wider public. But while as Mr. Buffett says “value investing is simple but not easy,” there is still a lot of confusion in the public sphere about value investing. As far as I can tell there are at least two misconceptions about value investing.
The first is the belief that all value investors do is sort stocks by price-to-earnings (P/E) or price-to-book (P/B) and buy the stocks with the lowest multiples with a preference for small-cap stocks. But this is only partly true. Value investors do like stocks with low multiple values and small capitalization stocks, because they consider them potentially undervalued – that is, worth examining a bit closer but not yet worth buying. To determine whether such stocks are worth investing in, value investors proceed to value them in order to estimate their intrinsic value and they invest in them only if these stocks meet the margin of safety requirement, namely their price is at least one-third below their intrinsic value. These are the truly undervalued stocks and the stocks worth investing in.
But a strategy that focuses on low multiple, small-cap stocks seems to fly in the face of what Mr. Buffett and other well known value investors do, which is to prefer larger cap stocks without necessarily low multiples. And this gives rise to more public confusion about value investing.
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So what is value investing and who are the true value investors – is it Mr. Buffett and his like-minded value investors, or the others who emphasize low P/E (or P/B) small-cap stocks? The truth is that both of them are value investors.
Value investing has evolved over time, not because anything has changed or that the rules of the game have changed, but mostly because the demographics and the size of assets under management of some of the key players have changed.
See full article here.