what is value investing 
value investing is an investment strategy that involves picking stocks that appear to be trading for less than their intrinsic or book value value investors actively ferret out stocks they think the stock market is underestimating they believe the market overreacts to good and bad news resulting in stock price movements that do not correspond to a company s long term fundamentals the overreaction offers an opportunity to profit by purchasing stocks at discounted prices warren buffett is probably the best known value investor today but there are many others including benjamin graham buffett s professor and mentor david dodd charlie munger buffet s business partner christopher browne another graham student and billionaire hedge fund manager seth klarman investopedia sydney saporitounderstanding value investingthe basic concept behind everyday value investing is straightforward if you know the true value of something you can save a lot of money when you buy it most folks would agree that whether you buy a new tv on sale or at full price you re getting the same tv with the same screen size and picture quality stock prices work in a similar manner meaning a company s share price can change even when the company s valuation has remained the same this means strictly speaking there is no such thing as a true or intrinsic value of the stock of a given company but there are relative values market participants can buy or sell shares without being tethered to an objective price figure therefore stocks like tvs go through periods of higher and lower demand leading to price fluctuations if the company s fundamentals are the same and its future opportunities are unchanged then the value of the shares is largely the same even though the price differs value investing developed from a concept by columbia business school professors benjamin graham and david dodd in 1934 and was popularized in graham s 1949 book the intelligent investor just like savvy shoppers would argue that it makes no sense to pay full price for a tv since tvs go on sale several times a year savvy value investors believe stocks work the same way of course unlike tvs stocks won t go on sale at predictable times of the year such as black friday and their sale prices won t be advertised value investing is the process of doing detective work to find these secret sales on stocks and buying them at a discount compared to how the market values them in return for buying and holding these value stocks for the long term investors can be rewarded handsomely intrinsic value and value investingin the stock market the equivalent of a stock being cheap or discounted is when its shares are undervalued value investors hope to profit from shares they perceive to be deeply discounted investors use various metrics to attempt to find the valuation or intrinsic value of a stock intrinsic value is a combination of using financial analysis such as studying a company s financial performance revenue earnings cash flow profit and fundamental factors it includes the company s brand business model target market and competitive advantage some metrics used to value a company s stock include free cash flow is the cash remaining after expenses have been paid including operating expenses and large purchases called capital expenditures which is the purchase of assets like equipment or upgrading a manufacturing plant if a company is generating free cash flow it ll have money left over to invest in the future of the business pay off debt pay dividends or rewards to shareholders and issue share buybacks of course there are many other metrics used in the analysis including analyzing debt equity sales and revenue growth after reviewing these metrics the value investor can decide to purchase shares if the comparative value the stock s current price vis a vis its company s intrinsic worth is attractive enough margin of safetyvalue investors require some room for error in their estimation of value and they often set their own margin of safety based on their particular risk tolerance the margin of safety principle one of the keys to successful value investing is based on the premise that buying stocks at bargain prices gives you a better chance of earning a profit later when you sell them the margin of safety also makes you less likely to lose money if the stock doesn t perform as you had expected so if you believe a stock is worth 100 and buy it for 66 you ll make a profit of 34 simply by waiting for the stock s price to rise to the 100 true value on top of that the company might grow and become more valuable giving you a chance to make even more money if the stock s price rises to 110 you ll make 44 since you bought the stock on sale if you had purchased it at its full price of 100 you would only make a 10 profit benjamin graham the father of value investing recommended buying stocks when they were priced at two thirds or less of their liquidation value this was the margin of safety he felt was necessary to earn the best returns while minimizing investment downside 1value investors believe the markets are not efficientvalue investors don t believe in the efficient market hypothesis which says that stock prices already take all information about a company into account so their price always reflects their value instead value investors believe that stocks may be over or underpriced for various reasons for example a stock might be underpriced because the economy is performing poorly and investors are panicking and selling as was the case during the great recession or a stock might be overpriced because investors have gotten too excited about an unproven new technology as was the case of the dot com bubble psychological biases can push a stock price up or down based on news such as disappointing or unexpected earnings announcements product recalls or litigation stocks may also be undervalued because they trade under the radar meaning analysts and the media inadequately cover them value investors don t follow the herdvalue investors possess many characteristics of contrarians they don t follow the herd not only do they reject the efficient market hypothesis but when everyone else is buying they re often selling or standing back when everyone else is selling they re buying or holding value investors don t buy trendy stocks because they re typically overpriced instead they invest in companies that aren t household names if the financials check out they also take a second look at stocks that are household names when those stocks prices have plummeted believing such companies can recover from setbacks if their fundamentals remain strong and their products and services still have quality value investors only care about a stock s intrinsic value they think about buying a stock for what it actually is a percentage of ownership in a company they want to own companies that they know have sound principles and sound financials regardless of what everyone else is saying or doing value investing requires diligence and patienceestimating the true intrinsic value of a stock involves some financial analysis but also involves a fair amount of subjectivity meaning at times it can be more of an art than a science two different investors can analyze the exact same valuation data on a company and arrive at different decisions so you ll need to develop a strategy that works for you some investors who look only at existing financials don t put much faith in estimating future growth other value investors focus primarily on a company s future growth potential and estimated cash flows some do both noted value investment gurus warren buffett and peter lynch who ran fidelity investment s magellan fund for several years are both known for analyzing financial statements and looking at valuation multiples in order to identify cases where the market has mispriced stocks despite different approaches the underlying logic of value investing is to purchase assets for less than they are currently worth hold them for the long term and profit when they return to the intrinsic value or above it doesn t provide instant gratification you can t expect to buy a stock for 50 on tuesday and sell it for 100 on thursday instead you may have to wait years before your stock investments pay off and you will occasionally lose money the good news is that for most investors long term capital gains are taxed at a lower rate than short term investment gains like all investment strategies you must have the patience and diligence to stick with your investment philosophy some stocks you might want to buy because the fundamentals are sound but you ll have to wait if it s overpriced you ll want to buy the stock that is most attractively priced at that moment and if no stocks meet your criteria you ll have to sit and wait and let your cash sit idle until an opportunity arises 