What is Value Investing?

Value investing is a style of investing that involves identifying stocks or other assets that are undervalued by the market. The idea behind value investing is to buy low and sell high, by finding assets that are priced lower than their intrinsic value.

What is Value Investing?

Value investing is a style of investing that involves identifying stocks or other assets that are undervalued by the market. The idea behind value investing is to buy low and sell high, by finding assets that are priced lower than their intrinsic value.

One of the most revered and successful investors of all time is Warren Buffet who is known for his value approach and one of his well-known principles includes “Price is what you pay, value is what you get”.

What is Intrinsic Value?

Intrinsic value is based on the company's assets, its value to customers, and its potential for growth. It also considers the company's debt, the amount of money it earns, and its financial health. For example, if a company has a lot of cash on hand, it could be worth more than what it is worth in the market. Intrinsic value is important for investors because it shows an investor the true value of a company, not just what it is worth on the stock market.  Calculating the intrinsic value of a company can be subjective since it estimates risk and future cash flows.

To determine the intrinsic value of a stock or asset, value investors use a combination of financial analysis and fundamental analysis. Financial analysis involves examining a company's financial statements, such as its balance sheet and income statement, to determine its financial health. Fundamental analysis involves evaluating the company's business model, its competitive position, and its growth prospects. 

During this course, we’ll create a custom scan on TWS with the value style of investing in mind.  TWS has added new features into the Fundamental Explorer, so we’ll delve into this new functionality too.

In addition to fundamentals, we’ll survey some qualitative and management checks to help assess non-quantifiable aspects of a company that can impact its long-term performance and value.  Some of which are reported in a company’s 10K and 10Q reports.

Another important concept we’ll visit is “margin of safety”. This is the difference between the intrinsic value of a stock and its current trading price. Investing with a margin of safety may help brace against market volatility and reduce some risks associated with investing.

Value investing may provide several benefits, including the potential reduction of risk, higher returns, and a more diversified portfolio. Because value investors are buying assets that are undervalued, there may be less risk of losing money than there would be if you were investing in more expensive assets.

However, value investing is not without its risks. One of the biggest risks of value investing is that the market may never recognize the intrinsic value of an asset, and the price may never rise. In this case, the investor could be stuck holding an asset that is worth less than what they paid for it.  We’ll dive into a few “un-value” signs to be aware of.

While there are risks associated with value investing, it can also provide significant benefits, including higher returns and a lower level of risk. 

Let’s start with the patriarch of value investing – Benjamin Graham.

Traders' Insight Article – What is Value Investing?