What is value investing?

Value investing , in English , is a long-term investment strategy that focuses on the company itself, and focuses on selecting listed companies whose market value is lower than their intrinsic value .

When the market value of a stock truly reflects its intrinsic value, investors can benefit greatly. This sounds simple, but it is not easy to actually do it.

What is value investing?

The basic idea of ​​value investing is to buy a company’s shares at a price lower than the company’s intrinsic value and hold them for a long time. When the stock price reaches or exceeds its intrinsic value, investors can make huge profits from the difference.

The most straightforward explanation is that you can buy items of better quality at a relatively low price.

Speculators often buy when the financial market is rising and sell when the market is falling.

Value investing, on the other hand, relies more on investors’ research and analysis of the company itself, and will usually make buying and selling operations that are different from those of most investors.

Therefore, value investors often need to research the fundamentals of listed companies, such as price-to-earnings ratio , price-to-sales ratio , debt-to-equity ratio , etc. These data can often be found in major brokerage firms. For example, Futu Moomoo provides important information such as financial statements and price-to-earnings ratios for each stock.

The concept of value investing was first proposed by Columbia Business School professors Benjamin Graham and David Dodd in their 1934 book “Security Analysis”, which provided a different judgment point for opening a position and making deposits from the traditional one.

Later in 1949, Graham mentioned this concept again in his other works and popularized it, gaining recognition from many investment elites.

This includes the recognition and compliance of Graham’s student, the famous investment guru Warren Buffett. In his subsequent investment journey, he added personal characteristics to the initial concept of value investing and obtained considerable personal benefits.

What are the key points of value investing?

How to judge whether the stock price is lower than the stock’s intrinsic value and whether to decide to buy it is the key to value investing.

Determining whether the stock price is lower than the stock’s intrinsic value requires a large amount of data analysis. Not only the stock company’s own situation (fundamental analysis) but also its development in the industry to which it belongs must be analyzed. This involves a large amount of data, and how investors find the most useful data among these vast amounts of data is a reflection of their personal abilities.

Whether to decide to buy is the biggest difference between value investors and ordinary investors: in traditional financial investment, market conditions are often linked to the emotional atmosphere of investors. When the market falls, everyone is worried and sells off their positions. When the price rises, most investors follow the trend and increase their positions with a positive mood.

The reason why many value investors have achieved such amazing returns is that they often stick to their own analysis and judgment and buy stocks when they believe the stock price is already lower than the stock’s intrinsic value. When the stock price truly experiences its own value or even exceeds it, the returns of value investors are very objective.

The most difficult part of value investing is judging the right time to buy. Although you are buying discounted goods, as a physical consumption, there are similar goods on the market for price reference. Merchants will give discount notices, or for example, year-round off-season promotions, etc. Buyers can roughly judge when it is most advantageous for them to buy.

However, in the financial investment industry, there are many factors that cause a company’s stock price fluctuations, and there are usually no obvious indicative warnings, so those who can correctly judge the buying point are usually the top value investors who are worshipped as masters.

What characteristics of a company do value investors generally focus on?

Analyzing a company’s financial situation is the most common task done by value investors. When analyzing, they usually focus on a company’s financial statements, price-to-earnings ratio, price-to-book ratio, debt-to-equity ratio, free cash flow, and PEG ratio.

1. Financial statements

Financial statements are data sheets that listed companies must submit to the U.S. Securities and Exchange Commission ( SEC ) every quarter and every year. Investors can find them on the SEC website or the website of the listed company.

The financial report shows the company’s operating performance for the quarter or year. In addition to the common data, value investors will also pay attention to the notes section of the report, which will explain in more detail the company’s financial situation for the quarter or year, as well as some unconventional financial conditions, such as sudden accidents encountered by the company, etc., to more clearly explain some of the data in the report, so as to have a more complete understanding of the target company’s operating conditions and operating performance.

2. Price-to-Earnings Ratio

The price-to-earnings ratio, or P/E value for short, shows the price that the current market is willing to pay for the stock. Value investors will use this value as one of the bases for judging whether the current stock price is overvalued or undervalued.

If the P/E ratio is high, it may mean that the stock price is high relative to its earnings, or is overvalued. Conversely, a low P/E ratio means that the current stock price is cheap relative to its earnings.

So, for value investors, the lower the P/E ratio, the more likely the company is to be considered a value stock.

However, the P/E ratio also has its own limitations as an analytical reference value. The P/E ratio can be used to compare different companies in the same industry, but it is meaningless for comparing companies across industries. Therefore, value investors will use the P/E ratio as a reference value rather than a guiding data.

2. Price-to-Book Ratio

Price -to-Book Ratio, abbreviated as P/B value, reflects the difference between the market value of a company’s stock and its book value.

Generally speaking, the larger the ratio, the higher the market value, and the lower the ratio, the lower the market value.

For value investors, they prefer to find companies whose market value is lower than their book value. When they determine that the current market value is too low after combining other data for analysis, they will buy. When the company operates normally and reflects its true value in the market, value investors will benefit.

3. Debt-to-Equity Ratio

Debt-to-Equity Ratio , abbreviated as D/E value, shows the ratio between the debt incurred by a company for financing its development and its shareholders’ equity.

The higher the D/E value, the higher the amount of financing obtained through debt is, which means that the company’s debt income is higher than its equity income in its financing situation. When the company’s operating income is unable to repay its debts, the shareholders’ investment in it, whether in the long or short term, is at great risk.

Because of different industry characteristics, D/E values ​​are usually compared among the same industry to accurately determine whether a company’s current D/E value is reasonable.

4. Free Cash Flow

Free cash flow, or FCF for short, is the available cash remaining after a company deducts its expenditure costs from the cash generated by its operations.

This value shows the efficiency of a company’s operations in generating cash, and is one of the indicators that value investors use to estimate the possibility of a company’s future earnings growth. Companies with growing free cash flow will have increased earnings in the future, and investors will be more likely to receive a return on their investment. If the stock price is low during the same period, it will become the focus of value investors.

5. PEG Ratio

The PEG ratio , full name is Price/earnings-to-growth ratio, which measures the relationship between a company’s current stock price and earnings growth.

By comparing current earnings to expected earnings growth, you can get a more complete picture of whether a stock is currently overvalued or undervalued.

Generally, stocks with a PEG value below 1 are considered undervalued because it indicates that the current stock price is too low compared to the expected earnings growth, and are usually the focus of value investors.

Advantages of Futumoomoo for value investors

For value investors, obtaining more operating information of target companies is the main way for them to make analysis and judgments. As an individual investor, this information can be obtained through many channels.

Through some professional trading platforms, you can get almost all the information you need on one platform, simplifying the data collection process. At the same time, you can also get free US stocks when you open an account and deposit money.

Books on value investing

1. “Securities Analysis”

The book was first published in 1934 and is one of the most influential books in the financial industry. It brings more specific value investment concepts and introduces a variety of value investment techniques. In its subsequent versions, the author Benjamin Graham’s favorite student, investment guru Buffett, wrote the preface for it, which established its position in the history of financial books.

2. “The Intelligent Investor: The Definitive Book on Value Investing”

The Chinese translation of this book is “The Intelligent Investor: The Definitive Book on Value Investing”. Since Benjamin Graham proposed the concept of value investing in 1934, this book published in 1949 established the term “value investing”, thus starting a new investment strategy in the financial investment industry. Benjamin Graham, the greatest investment consultant of the 20th century, taught and inspired people all over the world to make reasonable value investments in detail in this book.

3. “Berkshire Hathaway Letters to Shareholders”

This book compiles every letter that the “Oracle of Omaha” Buffett wrote to shareholders between 1965 and 2018. The content of the letters is complete and unedited, and even includes letters from 1965 to 1976 that were not on the Berkshire website. The various guidelines put forward by Buffett in the letters are known as “lesson plans” by the world. Buffett generously shared his experience and opinions with shareholders in detail.

4. Beating the Street

In this book, legendary fund manager Peter Lynch explains his investment strategy in detail and provides exclusive advice on how to select stocks, mutual funds, or a combination of the two for investment. Readers can develop a successful investment strategy for themselves with the help of expert advice from “the country’s number one financial planner.”

5. “The Dhandho Investor: The Low-Risk Value Method to High Returns”

In this book, Indian elite businessman Mohnish Pabrai lists the advantages and investment framework of value investing in an easy-to-understand way. The book expands on the investment concepts of Benjamin Graham and Warren Buffett, and combines his own successful experience, allowing readers to understand Mohnish Pabrai’s own Dhandho investment framework in a relaxed and interesting reading experience.

6. “Invest Like a Guru: How to Generate Higher Returns At Reduced Risk With Value Investing 1st Edition”

This book was written by Charlie Tian based on his actual investment experience. It not only provides readers with positive guidance on success, but also describes his own experience of failure, providing readers with more comprehensive investment guidance. The information contained in the book not only includes expert insights, but also provides many practical tools and operating methods with actual operational value. It is a guiding book that many entry-level value investors should not miss.

Who are the world-famous value investors?

1. Benjamin Graham

Graham is a British-born American economist, economics professor and investor. He is the originator of the value investing concept and is known as the “Father of Value Investing”. He is the professor and mentor of investment guru Warren Buffett. He has published two books of great significance in the history of financial investment: “Security Analysis” and “The Intelligent Investor”.

2. Warren Buffett

Buffett is the most famous value investor today, and also the most famous business tycoon and philanthropist in the United States.

Buffett currently serves as the chairman and CEO of Berkshire Hathaway. Buffett has shown a passion for investment since he was young, and later studied under Benjamin Graham, bringing his value investment philosophy to its fullest. His years of successful investment experience have earned him the title of “stock god”.

His famous saying: “Better to buy a wonderful business at a fair price than a fair business at a wonderful price.” is regarded as an investment guide by many investors.

3. Charlie Munger

Charlie Munger, Vice Chairman of Berkshire Hathaway, is better known as Buffett’s partner, and their partnership has created a legendary return on initial value of up to 2,000,000%.

The reason why he is not as famous as Buffett is that he is a person who pays more attention to his own pace. His investment style is the same as his way of dealing with people. He focuses on his own rhythm, finds targets that he thinks are worth investing in, and sticks to them.

Even Buffett commented on him: “He marches to the beat of his own music, which almost no one else listens to.” For value investing, doing this is the most difficult and most important thing. For example, he can look calmly at the current rise of “special purpose acquisition companies”, the full English name is Special Purpose Acquisition Companies (SPACs), and stick to his own views instead of following the crowd. Compared with most investors’ method of buying multiple stocks to achieve the purpose of diversifying their risks, he prefers to identify a few stocks that he is familiar with.

4. Peter Lynch

Peter Lynch is a famous American investor, mutual fund manager and philanthropist.

Lynch’s strong interest in the investment field and his active personal pursuit of learning made him join Magellan Fund in 1977. Within more than a decade, he made Magellan Fund quickly become a popular fund with an amazing annual return rate of 29.2%. Under his management, the assets managed by Magellan Fund increased from US$18 million in 1977 to US$14 billion. This performance is regarded as a “legend” in the industry.

Peter Lynch’s personal investment principle, “Invest in what you know” has become a guide followed by many value investors.

5. Seth Klarman

Seth Andrew Klarman is an American billionaire, top investor, hedge fund manager and author, and an active advocate of value investing philosophy.

Klarman currently serves as the CEO and portfolio manager of Baupost Group. In Seth Andrew Klarman’s investment process, it is known for following Benjamin Graham’s investment philosophy, buying unpopular assets when they are undervalued, setting a reasonable margin of safety and profiting from price increases.

Since Klarman founded the Baupost Group fund with $27 million in 1982, he has achieved a 20% compound investment return and currently manages $27 billion in assets.

6. Mohnish Pabrai

Mohnish Pabrai followed Buffett’s investment style and in 1991, he took out $30,000 from his 401(k) account and $70,000 from his credit cards to start TransTech, Inc., an IT consulting and systems integration company.

In 2000, Pabrai sold the company to Kurt Salmon Associates for $20 million. Before selling the company in 1999, inspired by Buffett Partnership, Mohnish Pabrai became a partner in Pabrai Investment Funds hedge fund. Subsequently, Mohnish Pabrai continued to expand his investment areas and investment business and became a successful value investor.

7. Joel Greenblatt

Joel Greenblatt is an American scholar, hedge fund manager, investor, author, and value investor.

Greenblatt served as chairman of the board of Alliant Techsystems from 1994 to 1995 and became a founder of New York Stock Auction Company.

In 2005, Greenblatt published his book, The Little Book that Beats the Market.

In the book, he introduced an investment strategy called “Magic Formula Investment”, which helps investors find “cheap and good companies” to bring high returns on capital to investors.

8. Bill Ackman

Bill Ackman, whose full name is William Albert Ackman, is a famous American investor and hedge fund manager. He is an aggressive value investor. His first principle of investment is “make a bold decision that no one believes in.”

Some classic cases include shorting MBIA’s bonds during the 2007-2008 financial crisis and his proxy fight with Canadian Pacific Railway. His actions, investment style and success cases have always been controversial, but this still cannot prevent some government officials, hedge fund managers or retail investors from praising him.

9. David Tepper

A successful businessman and a well-known philanthropist, he founded Appaloosa Management and became one of the most successful hedge fund managers. David Tepper insists on an investment strategy that requires a lot of research and a little luck. He believes that luck is the key to an investor’s success, but the premise of getting luck is that you are smart enough to discover and seize luck in time. In the field of value investment, he insists on choosing the target object after a lot of research and analysis, and often after smart research, he can have the luck to invest in the right object.

10. Carl Icahn

Carl his is one of the most successful investors on Wall Street and adopts the value investment philosophy.

He focuses more on a company’s assets and potential productivity than on earnings, which is what most Wall Street investors focus on.

When deciding on investment targets, he usually adopts a variety of strategies, such as: researching the business potential before investing, investing in undervalued assets, paying attention to the pricing ability of the company, not making impulsive decisions or doing nothing, avoiding the herd mentality, and making big bets on his best ideas. In the end, the philosophy he adheres to has also brought him a lot of benefits.

What are the characteristics of value investing?

1. Not paying much attention to short-term market conditions

Market analysis is an analysis that most investors must conduct when choosing an investment target, but for value investors, this task is almost ignored. They often only analyze the target company’s operating capabilities, corporate assets, and past performance, and then compare the current stock with the company’s financial capabilities to determine whether its stock price is lower than the intrinsic value of the company’s stock.

2. Don’t follow the crowd

Value investors who go against the trend often give people the illusion of being autocratic. They will not continue to invest with everyone when everyone is cheering for the stock market to rise, nor will they panic and speed up the withdrawal of funds when everyone is frowning over the stock market to fall.

Value investors are hardly affected by the overall market sentiment. They always watch the stock market like an outsider or concentrate on their own research and analysis. They focus on the stocks they are interested in and check the company’s operations without caring about the buying guidance of the company in the general environment. They then make some decisions that are different from the general market trend, such as adding positions when everyone is pessimistic.

Successful value investors often have very good concentration and can focus on their target stocks without being affected by the surrounding environment.

3. You need to have strong psychological qualities

Value investing is often a long-term investment. Unlike short-term investment, value investing focuses on the returns brought by a significant increase in a company’s value after long-term operations, rather than obtaining small price differences from short-term fluctuations.

In the long-term investment process, whether the company’s stock value increases at a speed that is consistent with expectations, whether the original investment confidence will be shaken when the value fluctuates or grows slowly, and whether one can stick to one’s investment philosophy when the overall environment is pessimistic, all these will determine the success or failure of value investing. Looking back at the experiences of value investment masters, we can see that almost all of them have strong psychological qualities to face all situations during the holding period of the target stocks. They turn investment into an art of playing against time and self.

4. Lack of Diversification

In traditional or most investment strategies, diversifying one’s investment assets is almost a universally recognized way to reduce risk, but this is not strongly advocated in value investment strategies.

However, value investors do not put all their eggs in one basket. They also invest in multiple stocks, but choose a few target stocks in different industries or economic sectors to achieve the goal of diversifying investment risks without over-diversifying.

Value investors search for target stocks in several areas and then invest in them, rather than spreading their funds across multiple recommended or favored stocks based on market trends like most investors.

5. Set a safety margin

Margin of Safety is one of the keys to the success of value investors.

Because value investing is a long-term investment, the investment return will not be reflected immediately when selecting and deciding the target, so they usually set a safety margin based on their investment style and risk tolerance, which is the acceptable error space of the expected value of the target stock.

In this way, if the stock price performance ultimately does not meet expectations, the setting of the safety margin will allow investors to stop investing in time, withdraw funds, and avoid losses.

What is the difference between value investing and deep value investing?

Deep Value Investing, in English, was proposed by Buffett’s teacher Benjamin Graham;

Value investing is called Value Investing in English, which was mainly proposed by Warren Buffett;

In terms of time, deep value investing is earlier than value investing. At the same time, the viewpoint of value investing comes from deep value investing.

Benjamin Graham, the father of value investing, first proposed the concept of value investing in 1934. He set the investment standard for stocks based on the company’s own value and its current stock value, and compared the prices. As long as the company’s stock price was lower than the company’s value, it was considered an investable object. This is the concept of deep value investing.

Later, Benjamin Graham’s apprentice and later investment guru Warren Buffett introduced company quality as an additional reference criterion based on his mentor’s philosophy. That is to say, when a company’s stock price is lower than its own value, only companies with good operations are worth investing in. This became the mainstream value investment concept later.

A more obvious metaphor for the two could be:

• Deep value investing is buying only cheap things, regardless of quality;
• Value investing means not only buying cheap things, but also buying things that are both cheap and of good quality.

What is the difference between value investing and growth investing?

Value investing and growth investing can be said to be the two main forces in the field of financial investment, and they each have their own characteristics.

Growth Investment

The stock price is higher than the market as a whole, as investors prefer companies with high P/E ratios and hope to benefit by selling at a higher price in the future as the company continues to grow.

The company’s stock price fluctuates more greatly than the overall market because the company’s high stock price is easily affected by various negative news in the market and can fluctuate greatly.

Growth-oriented investments place more emphasis on a company’s external business growth.

Value Investing

The stock price is lower than the market as a whole. Investors are more optimistic about companies with low current price-to-earnings ratios, believing that the value of the companies will be discovered and recognized by the market in the future, and they will obtain high returns through value equivalence.

The company’s stock price fluctuates more steadily and the risk is relatively small. Because it takes time for the target company’s value to manifest, value investing is more suitable for long-term investors.