Value Investing is a strategy used by investors that includes the picking of stocks that is being traded at a price less than its intrinsic or book value. Investors that follow this method actively choose stocks that the stock market is underestimating. Value investors believe that the market is overreacting, resulting in price movements that does not correspond to the company’s long term fundamentals. This overreaction offers an opportunity to the investors to make profit by buying the shares at a very discounted rate.
The most popular and well-known value investor till today is Warren Buffet, along with David Dodd, Benjamin Graham (Warren Buffet’s mentor and professor), Christopher Browne, Seth Klarman and Charlie Munger.
The main concept behind value investing is quite easy to learn and understand. If one starts using this technique in their investments, they can save a lot of money, but can also get good returns. Most people would agree with me that whether you buy a brand new Laptop on sale, or purchase it at full cost, they will be getting the same Laptop with the same features and technologies.
Stocks basically work in the same manner, that means that the company’s stock price can also change even if the company’s value has remained the same. Stocks, like Laptops according to the previous example, go through periods where the demands are high or low, that leads to fluctuations in price.
Value investing is the process of finding sales on the stocks and buying it at a discounted rate when compared to how market values them.
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