Value Investing
The strategy of selecting stocks that trade for less than their intrinsic value. Value investors actively seek stocks of companies that they believe the market has undervalued. They believe the market overreacts to good and bad news, causing stock price movements that do not correspond with the company's long-term fundamentals. The result is an opportunity for value investors to profit by buying when the price is deflated.
Typically, value investors select stocks with lower-than-average price-to-book or price-to-earnings ratios and/or high dividend yields.
Investopedia Commentary
The big problem is estimating the intrinsic value. Remember, there is no "correct" intrinsic value. Two investors can be given the exact same information and place a different value on a company. For this reason, another central concept to value investing that of "margin of safety". This just means that you buy at a big enough discount to allow some room for error in your estimation of value.
Also keep in mind that the very definition of value investing is subjective. Some value investors only look at present assets/earnings and don't place any value on future growth. Other value investors base strategies completely around the estimation of future growth and cash flows. Despite the different methodologies, it all comes back to trying to buy something for less than its worth.
Related Links
Ratio Analysis Tutorial
The Hidden Value Of Intangibles
Relative Valuation: Don't Get Trapped
Warren Buffett: How He Does It
See also: Dividend Yield, Fundamentals, Income Statement, Intrinsic Value, Price-Earnings Ratio, Price-To-Book Ratio, Undervalued, Value Stock, Value Trap, Warren Buffett
Also spelled: value investor, value investors, valueinvesting, valuestock, value stock, value investment
value investing