When you invest in stocks or any other assets, you want to buy it cheap and sell when the price increases, isn’t it? Value investing is nothing but the same. It is all about investing in stocks and other assets at lower prices and holding them until the prices increase. Benjamin Graham incorporated the term ‘value investing in his all-time famous book ‘ The Intelligent Investor ’ and since then, value investing has been one of the most popular investment strategies.
What is value investing?
Value investing is an investment strategy where the investor invests in stocks and other financial assets at a price lower than their intrinsic value. This indicates that the asset’s market price is lower than the intrinsic or fair value of the asset.
Suppose the share price of ABC company is Rs. 1000 at present; however, you have found out through fundamental analysis and research that the company’s intrinsic value is Rs. 2500. So, there is a gap of Rs. 1500. So, you invest in the stock at Rs. 1000 and wait until the price increases and reaches Rs. 2500. However, you can sell and book profit in between as well as per your investment goals.
The mechanism which works here is that market will always come to an equilibrium.If the market price is lesser than the intrinsic value, it will eventually increase and come to an equilibrium. Similarly, if there is another stock whose price is above the intrinsic value of the company, then it will decrease eventually.
If a stock is having a market price above intrinsic value, then it is known as overvalued stock/ company and if the current market price is below the intrinsic value, it is undervalued. Value investors look for stocks that are undervalued and invest in them.
What are the strategies for Value Investing?
There are different strategies that value investors opt for while investing in undervalued stocks:
- Undervalued stocks:
The first strategy or philosophy of value investing is looking for undervalued stocks. This can be done only by determining the intrinsic value or the true/fair value of the company. So, you can use the discounted cash flow method and other methods to find out the company’s intrinsic value. Once you get there, you can compare whether the market price is above or below the intrinsic value. If the market price is lower, you can invest in the stock as a part of your value investing strategy.
- Long-pull strategy:
Another strategy that investors opt for is the long-pull selection strategy. It involved searching for companies with the huge potential that any average company has. These companies are comparatively new and bring something unique to the table.
In India, only a handful of people invest in stock markets, primarily because of unawareness and improper risk management skills. With Value investing strategies, Indian investors can invest more into the market as the risk in value investing is comparatively lower while the return perspective is huge.
