This strategy began primarily with Benjamin Graham, a professor and professional investor in the early 20th century. He created a thorough guide that focused on the company’s cash flows, ability to pay debt, future prospects, and other factors in order to arrive at a valuation of the company.The idea is that the market might either misunderstand a company or undervalue its true earning potential. By looking at the business fundamentals, a savvy investor can estimate what a company is actually worth regardless of where the market sets its price. Once you find a company that is being undervalued based on its operations, you can invest at the low market price. When the market figures out how much it is actually worth, the stock price will increase. Furthermore, value investing is usually conducted with a discounted cash flow analysis, that attempts to value the present value of all future cash flows of a business, based on a variety of operating and efficiency factors. It is heavily based on one’s view and assumptions about the company and is used today by a host of successful hedge funds, institutions, banks, and individual investors.
In a nutshell :
- Value investing is an investment strategy that involves picking stocks that appear to be trading for less than their intrinsic or book value.
- Value investors actively ferret out stocks they think the stock market is underestimating.
- Value investors use financial analysis, don't follow the herd, and are long-term investors of quality companies.