Value investing is all about picking up bargains on the sharemarket.
If you're an investor, with the market at such low levels, now is the time to look at adding to your longer term portfolio.
If you're a short term trader, the underpriced stocks can often be the ones to rebound strongly.
The world's most famous and successful investor, Warren Buffett is a follower of value investing. In the last 30 years his company Berkshire Hathaway has returned more than 20% when compounded annually. It's pretty incredible to think that a $5000 investment at the end of 1967 in Berkshire Hathaway would now be worth more than $35 million.
The father of value investing is Benjamin Graham. His book with David Dodd 'Security Analysis' is still relevant and considered the leading text on value investing today. Benjamin Graham applied his concepts quite simply. He bought stocks that were trading at a discount to the liquidation or bankruptcy value.
Although value investing has taken many forms, at the heart it's all about buying stocks at a discounted price.
Warren Buffett takes things one step further by saying:
"It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price."
Benjamin Graham tells a story about Mr Market to make the point that while the market is illogical at times, the underlying business value usually doesn't change day to day.
His story on Mr Market goes something like this:
Imagine you own a business with some business partners. One of the business partners, Mr Market, is a little crazy. On some days he is incredibly optimistic and other days overwhelmingly pessimistic. He wants to sell his part of the business and one day he'll want to sell for an incredibly high price - say $2 million and on other days he'll only want a low price - say $10 000. These fluctuations of Mr Market offer opportunities for business minded investors to profit.
Value investing has proven to be a successful investment strategy. There are several ways to evaluate its success.
One way is to examine the performance of simple value strategies, such as buying:
Numerous academics have published studies investigating the effects of buying value stocks. These studies have consistently found that value stocks outperform growth stocks and the market as a whole.
Simply put, it's all about buying assets that are cheap. In some cases that means searching for bargains. In other cases it means stocks in areas that don't attract much attention.
While value investing is not for everyone, it's a good reminder that stocks aren't just prices moving up and down, up and down but behind the share prices is an actual business.
Happy investing!
Julia Lee Equities Analyst Bell Direct
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