Who is the value investor?

Who is the value investor?

A cynic, as the proverb says, is someone who knows the price of everything and the value of nothing. 

But the investor’s goal should be to know both the price and the value of some company’s stock. 

The goal of the value investor is to purchase companies at a large discount to their intrinsic value. What the business would be worth if it were sold tomorrow? In some point of view, all investors are “value” investors. Meaning that they want to buy a stock that is worth more than what they paid. Those who define themselves as value investors are concentrated on the liquidation value of a company. They try to figure out how much it might be worth if all of its assets are going to be sold tomorrow. However, the value can be a very complex thing because the idea of intrinsic value is not specifically limited to the concept of liquidation value. New investors should understand that the word “value” means a many different things.

The founder of modern value investing is Benjamin Graham. His book ‘Security Analysis’ is still popularly today. 

Benjamin Graham The founder of modern value investing
Benjamin Graham The founder of modern value investing

In case you were questioning, Benjamin Graham was an investor and author. He is considered the father of investing because he was one of the first people to use financial analysis to invest in stocks. And he did it in practice. Graham designed many of the standards and principles. Many current investors are still using his rules today. He is also known as Warren Buffett’s mentor.

Other investors known as important practitioners of the value approach are Sir John Templeton and Michael Price. 

The value investors have very strict, fixed rules governing how they buy a company’s stock. These rules are based on correlations between the current market price of the company and specific business fundamentals. Examples include:

Price-to-earnings ratios (P/E) below a certain absolute limit.
Dividend yields above a certain absolute limit.
Book value per share at a certain level relative to the share price.
Total sales at a certain level relative to the company’s market value.

A value investor seeks stocks that are trading at a price less than they are worth. There are investment services and guides that monitor the indicators of value stocks, but investors must interpret these analyses and make decisions based on their own instincts and what they think is the value, performance, and the underlying fundamentals of the company itself and its stock. 

Graham said: “Whether the investor should attempt to buy low and sell high, or whether he should be content to hold sound securities through thick and thin, the subject only to the periodic examination of their intrinsic merits, is one of the several choices of policy which the individual must make for himself. Here temperament and the personal situation may well be the determining factors.”

Value investor

There are 5 major stock investing strategies for value investors:

General Trading: Anticipating or participating in the moves of the market as a whole, as reflected in the familiar “averages.”

Selective Trading: Picking out stocks which, over a period of a year or less, will do better than the market.

Buying Cheap and Selling Dear: Coming into the market when prices and sentiment are depressed and selling out when both are exalted.

Long-Pull Selection: Picking out companies which will prosper over the years far more than the average enterprise. These are often referred to as “growth stocks.”

Bargain Purchases: Selecting issues which are selling considerably below their true value, as measured by reasonably dependable techniques.

These five strategies are identified as common stock investing that could conceivably result in better-than-average returns. This classification of value investing was made by Benjamin Graham, the father of value investing.

Quiz yourself about value investing in the following quiz:

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