What is Value Investing?
Value investing is an long-term investment strategy that involves buying stocks that are underpriced compared to the company's intrinsic worth of a company and its assets..
Value investing is not looking at the stock’s price fluctuations, but instead use fundamental analysis to determine if a stock is cheap or not. It is a contrarian approach to investing that aims at finding stocks that are overlooked by other investors.
The efficient-market hypothesis (EMH) is a theory in financial economics that states that stock markets are always fairly priced. The current price of a stock should therefor always be the right price with all information currently known.
This means that according to the efficient-market theory, it is not possible to outperform the market, and investors might as well purchase indexes.
Value Investing takes the stance that this efficient-market hypothesis is actually not right, and investors can take advantage of stocks that are mispriced. Value Investors are looking to buy shares that are below their intrinsic value and hold them for long periods of time, hoping that the stock price will reach the real fair value in the long term.
Margin of safety
Margin of safety is a core principle of value investing. Considering that the fair value of a stock is a representation of its future cash flows, and that the future is uncertain, the margin of safety provides protection for any unforeseen events that may cause a decline in the share price.
The larger this margin of safety, the better, as it means that there is more room for error and therefore less risk involved with buying shares in this company.
The Benefits of Value Investing
Value investing is an investment strategy that aims to buy stocks which are undervalued by the market. Value investors believe that buying stocks at a low price will result in higher returns.