What is Value Investing

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Why Value Investing is highly regarded as a safe market investment strategy

Key Takeaways

• Value Investing involves trading stocks based on the company's intrinsic value.
• Stocks can be overvalued or undervalued.
• The intrinsic value of a stock is imperative for Value Investing.
• Discounted cash flow, P/E and P/B are a few ways to find the intrinsic value.
• Value Investing allows for maximum returns over the long term.

With stock market investments, we aim to achieve capital appreciation. For years, economists have strategised ways to get the best returns on investment. One such economist, Benjamin Graham, introduced a means of stock market investment called Value Investing, where you build wealth over a long time with minimising risks. Read on to know more about Value Investing and how it works.

Value Investing – Meaning

Value Investments is a long-term investment strategy where investors identify stocks of companies that are undervalued but have a solid long-term prospectus. Such an investment approach requires in-depth knowledge of the market and the company's finances. Value Investing comprise two concepts – undervaluation and overvaluation. When a stock is trading at a lower price than its intrinsic value, it is said to be undervalued. Overvalued stocks trade at higher prices than their intrinsic value.

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How Value Investing Works

The fundamental of Value Investing is buying undervalued stocks and selling them when they exceed their intrinsic value. For example, stocks of Company X is being traded at INR 80 per share. When you analyse the company finances, you infer that the company has an excellent financial structure that brings its intrinsic value to INR 100, i.e., the currently traded stock is undervalued at INR 80. Investors believe that the share price will increase from INR 80 to INR 100 in the near future. Conversely, if you find the company's financial metrics poor and the intrinsic value to be INR 60, it implies that the stock is overvalued at INR 80.

Intrinsic Value and How to Derive It

The intrinsic value is the actual value or the maximum value of the stock at which you can buy the asset without incurring losses when you decide to sell it at a future date. Seasoned investors analyse various aspects of the company finance to determine the intrinsic value in Value Investing. These include:

• Earnings Before Interests and Taxes (EBIT): Company's cash flow before adding expenses and profits.
• Earnings Before Interests, Taxes, Depreciation, and Amortisation (EBTIDA): Company's cash flow before calculating the depreciation and amortisation expenses.
• Discounted Cash Flow: Valuing an asset using the time value of money where the current cash flow is more than the future cash flow worth.
• P/E Ratio: Price-to-earnings ratio or P/E ratio is the relationship between a company's share prices and its per-share earnings (EPS).
• P/B ratio: Price-to-book value ratio or P/B ratio is the per-unit book value of a company's assets and per unit share price.

Who Should Opt For Value Investing?

Patience is the key to Value Investing. A company can be performing poorly in the short term, which can be stressful to an investor. However, you get optimum returns with minimal risks over the long term. Another prerequisite is that you possess thorough knowledge about market operations.

Final Note

Value Investing helps you beat inflation over time while earning noteworthy returns. The essence of value investing lies in understanding a company's prospects instead of judging current stock prices at their face value.

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*Disclaimer: This article is for information purposes only. We recommend you get in touch with your income tax advisor or CA for expert advice.