Tips for Value Investors - #1: What is Value Investing?

What is value investing?

Value investing in the most simplest of terms is an investing strategy that involves purchasing securities that are perceived to be undervalued at their current price based on an underlying fundamental analysis of the company and the price of its securities.

The philosophy is based on the the idea that certain securities will be undervalued by the general public for two reason:

1. The security has been neglected, i.e. the market has largely not considered the security and therefore a lack of demand for the security has caused an inconsistency between its current market price and its fundamental underlying value.
2. Or, the security has been judged unfavorably by the market for one reason or another that the value investor may consider unwarranted or exaggerated. For example, the vastly deflated prices we saw after the 2008 crash was likely the result of a market overreaction and the value investor sees this as an opportunity to find solid securities at bargain prices.

With that said, the various strategies for exactly how one might identify these undervalued securities can be somewhat more complicated and will be the subject of my ongoing series: Tips for Value Investors.

Value investing is usually attributed to Benjamin Graham and David Dodd who began teaching the philosophy of investing in 1928 and eventually put their ideas forth in the now famous book Security Analysis originally published in 1934.

You might suspect that a book on securities investing published in 1934 might be somewhat outdated at this point. And, to an extent, you would be correct. Certainly the investing landscape has changed since then and indeed a strict adherence to value investing as Graham and Dodd have put it forth would be a less than comprehensive investing approach.

However, the fundamental concept of buying securities of financially sound companies at bargain prices remains to this day a solid basis for investing. In fact, many of the most successful investors have been students and proponents of value investing, including Warren Buffett, one of the richest men in the world.

Stay tuned for upcoming tips for value investors!