Value investing
Value investing is the practice of buying shares of companies for less than their intrinsic value.
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Expanded Definition
Value investing looks for mis-priced securities -- those stocks that are selling at a discount to their intrinsic value. Value investors assume that, over the long term, a stock price will more or less reflect the intrinsic value of the company. Buying at a discount, therefore, provides the investor with a situation in which the stock price should go up.
Value investing is frequently contrasted with growth investing, the practice of buying securities whose stock price will rise on the basis of the company's growth. But these distinctions are largely academic -- growth investors don't buy stocks thinking they're overvalued, and value investors don't buy stocks thinking the companies they represent won't grow.
However, value investors insist on buying companies whose price represents a significant margin of safety relative to the intrinsic value -- even if that means waiting to buy a great company until the price falls into the acceptable range.
Some value investors ("deep value" investors) try to buy with margins of safety of 50% or more relative to intrinsic value. When the stock approaches its intrinsic value, they sell and repeat the process. Other value investors look for a significant margin of safety but are also willing to pay more for established companies with long-term competitive advantages -- because, over the long term, those competitive advantages translate into compound market-beating returns. Some value investors are also contrarians and look for out-of-favor or distressed companies.
In all of these cases, however, the value investor is 1) estimating the intrinsic value of the company; 2) judging the stock price against the intrinsic value, not against recent price movements; 3) insisting on a margin of safety.
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