Value investing
Encyclopedia : V : VA : VAL : Value investing
Value investing is a style of investment strategy. Followers of this style, known as value investors, generally buy companies whose shares appear underpriced by some forms of fundamental analysis; these may include shares that are trading at, for example, high dividend yields or low price-to-earning or price-to-book ratios. The main proponents of value investing, such as Benjamin Graham and Warren Buffett have argued that the essence of value investing is buying stocks at less than their intrinsic valueIntelligent Investor, Benjamin Graham, Ch.20. The discount of the market price to the intrinsic value is what Benjamin Graham called the "margin of safety". The intrinsic value is the discounted value of all future distributions. However, the future distributions and the appropriate discount rate can only be assumptions. Warren Buffett has taken the value concept even further as his thinking has evolved to where for the last 25 years or so his focus has been on "finding an outstanding company at a sensible price" rather than generic companies at a bargain price.
History
This style of investing was established by Benjamin Graham, who taught many famous investors during his tenure at Columbia University. In his book The Intelligent Investor (last revised in 2003), he advocated the important concept of margin of safety, which calls for a cautionary approach to investing. In terms of picking stocks, he recommended defensive investment in stocks trading not far from their tangible book value as a safeguard to adverse future developments often encountered in the stock market.However, the concept of value (as well as "book value") has evolved significantly since the 1970s. Book value is meaningful only in some traditional stable industries where the value of an asset is well defined. When an industry is going through fast technological advancements, the value of its assets is not easily estimated. Sometimes, the production power of an asset can be significantly reduced due to competitive disruptive innovation and therefore its value can suffer permanent impairment. One good example of decreasing asset value is a personal computer. An example of where book value does not mean much is the service and retail sectors. One modern model of calculating value is the discounted cash flow model (DCF). The value of an asset is the sum of its future cash flows, discounted back to the present.
Value Investing Performance
Value investing has proven to be a successful investing strategy. There are several ways to evaluate its success. One way is to examine the performance of simple value strategies, such as buying low PE ratio stocks, low price-to-cash-flow ratio stocks, or low price-to-book ratio stocks. 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.[The Cross-Section of Expected Stock Returns, by Fama & French, 1992, Journal of Finance] [Firm Size, Book-to-Market Ratio, and Security Returns: A Holdout Sample of Financial Firms, by Lyon & Barber, 1997, Journal of Finance] [Overreaction, Underreaction, and the Low-P/E Effect, by Dreman & Berry, 1995, Financial Analysts Journal]
Another way to examine the performance of value investing strategies is to examine the investing performance of well-known value investors. Simply examining the performance of the best known value investors would not be instructive, because investors do not become well known unless they are successful. This introduces a selection bias. A better way to investigate the performance of a group of value investors was suggested by Warren Buffett, in May 17, 1984 speech that was published as [The SuperInvestors of Graham and Doddsville]. In this speech, Buffett examined the performance of those investors who worked at Graham-Newman Corporation and were thus most influenced by Benjamin Graham. Buffett's conclusion is identical to that of the academic research on simple value investing strategies--value investing is, on average, successful in the long run.
Well Known Value Investors
Benjamin Graham is regarded by many to be the father of value investing. Along with David Dodd, he wrote Security Analysis, first published in 1934. The most lasting contribution of this book to the field of security analysis was to emphasize the quantifiable aspects of security analysis (such as the evaluations of earnings and book value) while minimizing the importance of more qualitative factors such as the quality of a company's management. Graham later wrote The Intelligent Investor, a book that brought value investing to individual investors. Many of Graham's students, such as William Ruane, Irving Kahn, Walter Schloss, and Charles Brandes went on to become successful investors in their own right.
Graham's most famous student, however, was Warren Buffett, who ran successful investing partnerships before closing them in 1969 to focus on running Berkshire Hathaway. Charlie Munger joined Buffett at Berkshire Hathaway in the 1970s and has since worked as Vice Chairman of the company. Buffett has credited Munger with encouraging him to focus on long-term sustainable growth rather than on simply the valuation of current cash flows or assets.[Warren Buffett's 1989 letter to Berkshire Hathaway shareholders]
Another famous value investor is John Templeton. He first achieved investing success by buying shares of a number of companies in the aftermath of the stock market crash of 1929. He went on to become famous for investing in global equity markets.
Many successful value investors have gained fame recently. Joel Greenblatt is widely renowned for achieving annual returns at the hedge fund Gotham Capital of over 50% per year for 10 years from 1985 to 1995 before closing the fund and returning his investors' money. He is known for investing in special situations such as spin-offs, mergers, and divestitures. Edward Lampert is the chief of ESL Investments. He is best known for buying large stakes in Sears and Kmart and then merging the two companies.
Other Notable Value Investors
- Shelby Davis
- David Dreman
- Mario Gabelli
- Irving Kahn
- Bill Miller
- John Neff
- Michael Price
- Whitney Tilson
- Martin J. Whitman
- Eric Schleien
- Geoff Gannon
- Irwin Michael
References
See also
- Index investing
- Growth investing
- Socially responsible investing
- Ethical investing
- Appreciation
- Capital accumulation
- Financial economics
- Investment management
- Investor profile
- Investor relations
- Return on investment
- Saving
- Speculation
- Stock investor
- Value Investing Congress
| List of Marketing Topics | List of Management Topics |
| List of Economics Topics | List of Accounting Topics |
| List of Finance Topics | List of Economists |
Formative Value Investing Books
- The Intelligent Investor (1949), by Benjamin Graham. ISBN 0060555661
- Security Analysis (1934), by Benjamin Graham. ISBN 0071448209
- The Essays of Warren Buffett (2001), edited by [Lawrence A. Cunningham]. ISBN 0966446119.
- You Can Be a Stock Market Genius (1997), by Joel Greenblatt. ISBN 0684840073.
- The Little Book That Beats the Market (2006), by Joel Greenblatt. ISBN 0471733067.
- Contrarian Investment Strategies: The Next Generation (1998), by David Dreman. ISBN 0684813505.
Value Investors at
External links
From Wikipedia, the Free Encyclopedia. Original article here. Support Wikipedia by contributing or donating.
All text is available under the terms of the GNU Free Documentation License See Wikipedia Copyrights for details.