What is value investing?

Value investing is an investment model which involves buying undervalued securities. The securities whose market price is lower than its intrinsic value are undervalued securities. In simplest forms buy the security with highest margin of safety.

Margin of safety= Intrinsic value- Market Price. The lower the market price compared to intrinsic value higher will be the margin of safety. The intrinsic value is the discounted value of all future distributions. However, the future distributions and the appropriate discount rate can only be assumptions.

Long term Investment in value stocks involves lower risk and higher returns as strong scrip’s are bought on lower side.

Value investing was established by Benjamin Graham and David Dodd, It was followed by Buffet and many more after that. Graham never used the phrase, “value investing” — the term was coined later to help describe his ideas and has resulted in significant misinterpretation of his principles, the foremost being that Graham simply recommended cheap stocks.

Value investing is opportunity for smart people when weak; indiscipline public runs away from stock market. Till market rises, traders feel great about their trades but as market reverses back down it starts fear and if fall is chronic public ends up in panic selling with a determination to leave market forever. This paves the way for smart money as that is opportunity of value investing which stimulates bounce back after the exit of general public and this never-ending cycle of Stock Market goes on and on…