What is value investing? The tool that helped greats like Warren Buffett become rich.
Who doesn’t like discounts? No one! All of us with a sensible mind prefer to buy things available at a discount at their original price. The same philosophy can be used when considering the stock market. Many times due to numerous reasons like bearish sentiment, negative results etc. Companies are available at a discount to their actual value and value investors like Warren Buffett look for companies that can be bought at cheaper prices just like we wait for the discount season to come to go out shopping.
The returns generated by value investing have outperformed the returns generated by any other form of investment or trading. The stock market investment is never hundred percent efficient and the prices of stocks are never at their exact value due to the factor known as market inefficiency. But as the time passes the prices of the stocks have to come close to their actual intrinsic value at some point or the other. This makes value investing a kind of a risk free investment because when you know that an asset that has an intrinsic value of ₹100 is available at ₹80 due to some form of market interferences why not buy it and wait for it to get to its actual value, which is bound to happen sooner or later.
Valuation can be a difficult process to master because there are tons of things to analyse and study, but if done with diligence and patience it can be extremely rewarding. Value investing is basically a process of taking out the actual price or value of a company through an in-depth fundamental analysis and use of valuation tools. For individuals with a non finance background valuation analysis can be conducted by examining financial ratios like P/E, P/BV etc. But it is important not to rely only on these and it can be more useful to use them as qualification parameters for in-dept analysis.
In value investing, the goal is to tap in the undervalued stock that comes in an irrational manner to the investor and the investor seeks to gain profit from this irrational investments. This is a very subjective and selective process as two different investors can come to two different views regarding the same stock. There are two ways by which an investor can tap in these irrational stocks, either by selecting stocks with lower than average price to book ratio and lower than average price to earnings ratio with higher dividend returns. The difference between both will be the profit to the investor. Another concept to clear further doubts will be to consider the margin of safety to come to the intrinsic value of the stock. In total the inherent or the intrinsic value is required of the shares to estimate which is a valued investment.
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