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Value Investing

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updated 13 Feb 2023

Value investing is an investment strategy that involves buying stocks or other securities that are considered undervalued by the market. The idea is to buy assets that are trading at a lower price than their intrinsic value, with the expectation that the market will eventually recognize the assets true value, and the price will eventually increase.

Value investors typically focus on the fundamentals of a company, such as its earnings, dividends, and assets, to determine its intrinsic value. They may also look at factors such as the company's management team, industry trends, and economic conditions to determine if a stock is undervalued.

Value investors generally have a long-term investment horizon and are willing to hold on to stocks for extended periods of time, even if the market is not recognizing the stock's value. They believe that over time the market will recognize the stock's true value and the price will increase, providing a good return on investment.

Value investing was popularized by Benjamin Graham and David Dodd in the 1930s, and it has been further developed by investors such as Warren Buffett, who is considered one of the most successful value investors of all time. Peter Lynch is a notable value investor who has advocated that normal everyday folks can pick good stocks by looking at good companies that are available at attractive prices.

9 Key Metrics for Value Investors

Value investors typically use a variety of metrics and values to evaluate a company when determining if it is undervalued. Some key metrics and values that value investors may consider include:

  1. Price-to-Earnings (P/E) ratio: The P/E ratio compares a company's stock price to its earnings per share (EPS). A lower P/E ratio may indicate that a stock is undervalued.

  2. Price-to-Book (P/B) ratio: The P/B ratio compares a company's stock price to its book value (the value of its assets minus liabilities). A lower P/B ratio may indicate that a stock is undervalued.

  3. Dividend Yield: The dividend yield is the annual dividend per share divided by the stock price. A high dividend yield may indicate that a stock is undervalued.

  4. Earnings Yield: The earnings yield is the inverse of the P/E ratio and is calculated as earnings per share divided by the stock price. A high earnings yield may indicate that a stock is undervalued.

  5. Free Cash Flow: Free cash flow is the cash that a company generates after accounting for capital expenditures. A company with strong free cash flow may be considered undervalued.

  6. Debt-to-Equity ratio: The debt-to-equity ratio compares a company's total debt to its total equity. A lower debt-to-equity ratio may indicate that a company is in a stronger financial position.

  7. Return on Equity (ROE): The return on equity measures how efficiently a company generates profits from its shareholders' investments. A high ROE may indicate that a company is undervalued.

  8. Management: A company with a competent and experienced management team is more likely to be able to navigate through difficult times.

  9. Industry trends and economic conditions: The company's future growth prospects should be evaluated in the context of the overall economic and industry conditions.

These are just some of the metrics and values that value investors may consider when evaluating a company. The specific metrics and values that are used can vary depending on the investor's investment philosophy and the type of company being evaluated.

Other Resources

How to Calculate Intrinsic Value of Company