09 March 2012

Value Investing and Its Advantages

Benjamin Graham was not only a widely respected author and expert on value investing; he is often credited with creating the foundation for modern fundamental analysis of stocks. Value Investing is an investment strategy used by some of the country’s more prominent investors, most notablyWarrenBuffett.

For value investing to work, the investor must find companies that are trading at a market price that is a discount to the intrinsic, or real, value. The difference between the market price and the intrinsic value of a stock is known as the ‘margin of safety’. The margin of safety protects the investor from both poor decisions and downturns in the market. Because true value is very difficult to accurately compute, the margin of safety gives the investor room to make a mistake.

So, value investing is an approach to investing that singles out specific investments; stocks or bonds that are undervalued in relation to similar companies. That is not the same as cheap, however. An undervalued investment may still have a high share price in relation to other stocks in the same category. What is important is the relative value of the stock using tools such as the P/E ratio, price to book ratios, and other tools of fundamental analysis.

For many investors who practice value investing, blue chip stocks are often a key ingredient in their portfolios. Blue chip stocks often epitomize what value investing is all about- companies that have a solid earnings history, strong financials, a history of dividends, and a sizeable market share.

Value investing is not only based on purchasing good companies at low prices, but holding for the long term.