Setting The Record Straight On Value Investing

Setting The Record Straight On Value Investing
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Setting The Record Straight On Value Investing by George Athanassakos, The Globe and Mail

Value investing is all about stock picking. It is a style of investing that helps one find and buy stocks that trade significantly below intrinsic value. According to the father of value investing, Ben Graham, a value investor wants to buy a stock that is worth one dollar for 50 cents. While this is common knowledge, there is, in general, lack of in-depth understanding of what value investing is in terms of who the value investors are, what they believe in, what process they follow, whether such process works and why. I will try to set the record straight in this article.

Who are the value investors?

They are long-term bottom-up fundamental analysts who arrive at an intrinsic value of a stock using long-term fundamentals. Such intrinsic value is not affected by short-term announcements and press releases, but by such factors as whether the company operates in a free-entry environment or not, whether it is well managed, whether it has a good business model and whether it is conservatively financed. If the stock price is well below the intrinsic value, by what is known as the margin of safety, then value investors buy in, otherwise they stay on the side lines.

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What do they believe in?

Their principles are key in what value investors believe. First, they believe that when you buy a stock, you do not buy a piece of paper. Instead you buy the company and you should know a lot about the company. As one cannot know much about a lot of companies, value investing involves holding a concentrated portfolio of stocks. Second, since stocks a lot of the time go up or down for reasons unrelated to fundamentals, one must try to take advantage of such movements as opposed to following them. This means that when everyone is exuberant, one must be cautious and when everyone panics, one should look for opportunities. Third, we must always look for the margin of safety. The margin of safety was 50 per cent at the time of Ben Graham, but has come down to one-third of the intrinsic value in current times. Since valuation deals with the future in an uncertain world and so is subject to mistakes and inaccuracies, the margin of safety protects your downside.

What process do they follow?

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