Is Value Investing Still Important?
At a time when the Dow Jones, S&P 500 and the NASDAQ are hitting new highs almost every day, it’s so easy to say that traditional value investing does not matter.
Indeed, Goldman Sachs, the world’s biggest investment bank, actually said that “value investing is dead.” Believe it or not!
One of the top value investors of the 21st century, Jeremy Grantham said in a letter to investors, titled “This Time Seems Very, Very Different” that old rules of value investing do not matter anymore because the valuations are so high and expected to stay that way for the foreseeable future.
Is that really the case? Are value investors such as Warren Buffett and Prem Watsa a dying breed? Should you simply ignore the value investing principles and just focus on the technical charts?
Well….to answer these questions, let’s take a deep dive and discuss what value investing really is about.
What is Value Investing?
Value investing is a style of investing that was developed by Benjamin Graham, and perfected by Warren Buffett and others. It is based on a simple 3-step process.
Step #1: Identify undervalued stocks based on valuation metrics such as price-to-earnings (P/E) and price-to-book (P/B).
Step #2: Estimate the intrinsic worth of low P/E or P/B stocks.
Step #3: Buy the stock only if the stock price falls below the intrinsic value within a margin of safety of around 20 to 30 percent.
How Value Investors Think ?
Value investing competes against other styles of investing such as modern portfolio investing, which state that markets are efficient, so all you need to do is to have a diversified portfolio or invest into an index fund and trust the market to do the rest.
Value investing is that opposite of modern portfolio investing.
Value investors pay a lot of attention to valuation risks, which means ensuring they don’t pay too much for a stock. They are often contrarian pickers, who pick up stocks that have already bottomed out, with a long-term perspective of 5 to 10 years or more.
Value investors are not concerned with beta, standard deviation or volatility. The only measure of risk for them is losing capital. The #1 rule in value investing is to never lose capital, no matter what, which is why value investors only pick stocks that fall within a certain margin of safety.
Value investors never overreact to news or events, or act as a part of a herd. They are neither overly optimistic nor pessimistic, but highly realistic.
It is a style of investing that may or may not serve you well when the markets are booming, but will come to your aid when things are not so good, and fear rather than greed dominates.
We are seeing such a scenario emerge in India, China, Turkey and Europe, where markets have taken tumble this year. Value investing is back in fashion and it looks like momentum players have been driven out of the markets.
Do you want to learn Value Investing from an Expert?
Then sign up for The Valuation Analyst Skills Training (VAST) course at SKILLFIN LEARNING.
You will learn how to assess the business model of a company, analyze Annual Reports, create proforma standardized financial statements and valuation models, forecast future financial statements, extrapolate financial ratios and much more.
This course can help you in your quest to get a job as a financial analyst. It is also targeted at working professionals who want to learn value investing to make more money in the stock markets.
The online course will be taken by Ashish, who has 10 years of experience in the finance industry and has worked with BlackRock and McKinsey in the past. Ashish works as a finance and business strategist.
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