Value investing is the practice of buying shares of companies for less than their intrinsic value.
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. A well worn analogy on this outlook, provided by "the father of value investing," Benjamin Graham, is that of the stock market acting as a voting machine over the short-run, but a weighing machine over the long-run. 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. Value investors seldom find themselves investing alongside the crowd. If anything, value investors tend to invest against the headlines.
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, most notably Warren Buffett, look for a significant margin of safety but are also willing to pay more for established companies with durable competitive advantages, aka economic moats. Their rationale is that, over the long term, those wide moats translate into compound market-beating returns.
In all of these cases, however, the value investor is 1) estimating the intrinsic value or a range of potential values of the company; 2) judging the stock price against the intrinsic value, not against recent price movements; 3) insisting with a margin of safety.
Related Fool Articles
- Value Investing 101
- 5 Value Traps to Avoid Right Now
- Charlie Munger's Thoughts on Just About Everything
- Bufett's Top 10 Investing Secrets
- 10 Quotes From One of the Greatest Investing Books of All Time
Recent Mentions on Fool.com
- How the Housing Market Could Affect Stocks in 2015
- Is This the "Ma Bell Breakup" Moment That Will Dismantle the Mega Banks?
- What Happens When Your Investment Plans Work?
- Don't Let Oil Distract You From This Potentially Epic Real Estate Collapse
- Goldman Sachs' Worst Predictions of 2014
- How Safe Is Coach Inc Stock and Its Dividend?