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Value Investing And Intrinsic Value Concept
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Much has been written about the principles of 'Value Investing' since Ben Graham and David Dodd, brought the concept of ‘Value’ to the mainstream with their 1934 book, Security Analysis, which remains one of the most iconic pieces of financial literature ever written. Value investing in India is gaining tremendous following with more and more investors realizing the importance of buying stocks in companies that trade below their Intrinsic Value. The main purpose of trying to discover intrinsic value of a share is to find fundamentally strong, undervalued stocks.
A stock might be the right to own a piece of a business, and the intrinsic value of the stock was something you could estimate, but with a margin of safety, you can sleep at night. - Warren Buffett
Value investing focuses on the business and the fundamentals of the company rather than the external influences on the stock’s price. It does so as it believes that the market often overreacts to good and bad news, resulting in sharp stock price movements that are not in sync with the company's fundamentals. The result is an opportunity for investors to profit by buying when the stock is underpriced.
The primary focus of most of the investors is on returns i.e. on how much money they can make. Investors on the other hand focus on risk i.e. on how much they can lose. This is because the main goal is preservation of capital. Hence Ben Graham and David Dodd advocated the concept of ‘margin of safety’ is the cornerstone of value investing. This margin of safety protects the value investors from large losses when the markets are declining
It's important to know that there is a difference between a value company and a company that simply has a declining price. Important indicators that need to be considered are price to earnings (P/E) ratio, price to book value (PBV) ratio, PE to growth in earnings ratio or PEG ratio, and dividend yield. Lower the number; better the opportunity in terms of value investing.
This is one of the most popular investment themes globally and can be applied in all types of markets -- developed or developing such as India. The argument for this view is that the investment strategy is not impacted by the type of market in order to be successful but by factors such as market sentiment, industry life cycles, etc.
In conclusion, value investing focuses on finding fundamentally strong stocks which momentarily fall below their intrinsic value (i.e. true worth) while their long term business prospects remain strong. At the same time the focus is more on the investor’s cost; lower the cost, higher the margin of safety. The key to profit from this investment style is to stay with the investment for the long term and hence the research in the very first place focuses on finding stocks in companies which will continue to increase their earnings over the next years.
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