Value Investing
Value investing is a strategy of buying securities that appear underpriced relative to their intrinsic value. Value investors analyze fundamentals to find bargains the market has overlooked or unfairly punished. They have long time horizons and require patience.
Understanding the Concept
• Focus on intrinsic value vs. market price • Key metrics: P/E ratio, price-to-book, free cash flow yield • Margin of safety: buying significantly below intrinsic value • Famous practitioners: Warren Buffett, Benjamin Graham
Real-World Example
A company trades at $50 with a P/E of 8 while competitors average P/E of 15. After analyzing financials, you determine intrinsic value is $75. The market has overreacted to temporary bad news. You buy and wait. Over two years, sentiment improves and price rises to $80. Your patience is rewarded.
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