Unlike the figurative terms “bull market” or “dry powder”, the financial catchphrase “value investing” means exactly what it says. This paradigm of investing is based on the idea of buying securities that have shares deemed undervalue by whatever benchmark is being used to measure. These securities could be public stock traded at a discount, with high dividend yields, low price-to-earning multiples or specifically chosen by any other number of analysis methods. The “margin of safety” to the investor is the discount of the market price to the intrinsic value of the shares.
The concepts were first taught by Ben Graham & David Dodd at Columbia Business School in 1928 and were expounded on in a subsequent book called Security Analysis published in 1934. Since these early days, the idea of “value investing” has been embraced by many successful market experts who have also added their personal contributions to the topic. For example, legendary money manager, Warren Buffet, has prioritized investing in an “outstanding company at a sensible price” over a blandly common company offered at rock-bottom prices. Broadly speaking, the performance of value investing is evaluated in several manners. Simple value strategies can be examined such as buying low PE ratio stocks, low price to book ratio stocks or low price to cash flow ratio stocks.
There have been many published studies that outline the theory of buying value stocks. Another way to evaluate success of value investing is to look at the methods in which successful investors have picked and chosen stocks and whether they are successful over the long haul. One major criticism with value investing is that when seemingly undervalued shares are bought in a bear market, they can still decrease further along with the market. And, just the opposite, a problem with not buying once-overvalued shares in a bull market is that prices may still rise along with the market. Also, others point out that the non-standardized way in which “intrinsic value” is analyzed can be perceived differently by each person doing the analyzing.