Unravelling the Principles and Benefits of Value Investing

Usually scoffed at as investing with a rear-view mirror, value investing has proven to be a successful strategy over time for those who practice it religiously. This method of investing involves identifying and buying stocks where the intrinsic value of the stock is greater than the price it trades at. Investors, who practice this investment strategy, always keep a term in mind – 'Margin of Safety.' But what, one may ask, is value investing and how does it work? Also, what are its benefits and how it has stood the test of time for the practitioners? These are some of the questions we will address in this article. Value investing, a brainchild of Benjamin Graham and David Dodd from Columbia Business School, developed during the 1920s. In simple terms, Graham stated that each investment should be viewed as owning a portion of the business. Instead of focusing on stock market movements, investors should look at the underlying businesses' earnings and dividends, assets and value. Later, Warren Buffet, a disciple of Graham, added another dimension to value investing. He suggested looking for businesses with a durable competitive advantage that are run by competent and honest managers. Value investing works by the method of the comparative analysis of intrinsic value and market value. The intrinsic value of a stock is calculated based on the discounted value of future cash flows, while the market value is the current share price of the stock. When the intrinsic value of a stock is higher than the market value, it signifies that the stock is undervalued and vice versa. One of the benefits of value investing is the reduced risk factor. The 'Margin of Safety' in value investing allows investors to buy stocks at a less price than their actual value – this difference is what constitutes this 'safety margin.' In case the company doesn't perform as expected or if there are any unexpected market fluctuations, this 'safety margin' can absorb the blow. An important feature of value investing is its focus on long-term returns rather than short-term gains, making it less susceptible to stock market volatility. Moreover, value investing prompts investors to think like business owners rather than traders, thereby promoting more informed and accountable investing decisions. Finally, investors gain practical insights into companies' operations besides merely focusing on their financials. This often results in a more profound understanding of the company and its performance, enabling more grounded and rational investment decisions. However, value investing doesn’t come without its pitfalls. It requires investment in time and effort, patience, perseverance, and discipline. Also, in periods of a market rally, these stocks may seem to underperform compared to growth stocks. But, in the long run, they typically outperform, hence the need for patience and a long-term investment horizon. In conclusion, while the concept of value investing has evolved over the years, the basis remains the same: Buy quality stocks that are undervalued. Despite the evolution of various trading methods and algorithms, the relevance of value investing remains intact – proving time and again that it is not just a strategy, but an art that delivers steady and sustainable returns to the patient and discerning investor.