What is value investing.
What is value investing.
Value investing involves buying low risk undervalued stocks.
What is Value Investing? Value investing involves buying low risk undervalued stocks. It is common place throughout life and business but is often ignored or considered unimportant when outside passive minority investors (OPMIs) invest in publicly traded shares. Being the majority approach in privately owned business, value investing is done by a minority of stock investors. Value investing incorporates a "bottom-up" approach with investment decisions being based on specifics not general rules. It focuses on analytic variables quite different from those used in security analysis or corporate finance and no a priori primacy is given to any one factor in an appraisal. In value investing, price, quality and quantity of resources and long term wealth creation potential drive asset allocations and preferences. Unlike in the other investment disciplines the emphasis is placed on micro factors; that is factors that will specifically affect a company in the long term. In the other investing disciplines the first factors usually considered are macrofactors such as the level of stock averages, forecasts of growth rates or gross domestic product. Businesses are examined as integrated wholes, as going concerns and resource converters deploying and redeploying their asset bases and liabilities into new areas. In going concern analysis the emphasis tends to be on what future flows will be, whether cash flows or accounting earnings. In resource conversion analysis, the emphasis is on the market value of the corporation's assets and the prospects that the corporation might have access to capital markets on an attractive basis. OPMI market price tends to be a realization figure rather than a valuation figure. Frequently stock prices represent only a small fraction of what corporations are worth. Market prices can be lower and also much higher than the prices that would be reached in arms-length negotiations between informed business people. In value investing the analyst/investor is extremely price conscious. This contrasts to other investment disciplines in which there is a strong tendency to be outlook or "in-vogue" conscious. Most OPMIs in Asia are traders which tend to concentrate on near term momentum or graphs which show price break outs. However, when using value-investing techniques finding an attractive opportunity is often easier and less competitive, furthermore it focuses on "today" not a maybe tomorrow. Value analysts do not have access to superior information instead they use the available information in a superior manner. Greater weight is attached to the strength of a stock's financial position. This may be of superior use than the so-called efficient market hypothesis (EMH) considerations. Here the emphasis is on forecasting future flows, which seems a far cry from using available information in a superior way. In value investing, the quality of information is judged by estimating how the information may affect corporate values, dynamics or the right and privileges attached to various securities. The importance of a particular piece of information depends on context. When examining risks the value analyst considers permanent impairments of capital but not unrealized market losses or a reduction in the amount of unrealized market profits. Never is an investment perfect. Virtually, the first thing to be done for each value investment is to determine what is wrong and keep asking what could be wrong. Experience and judgement is then used to determine whether the problems are not such that they would dissuade investing in the considered security. Many investors using value techniques are not permanent or even semi permanent investors even though they analyze as if they were; examples include risk arbitrageurs and creditors holding non-performing loans. Although value investing is presented as a preferred technique for any investors it is an unsuitable approach in several contexts. ---When operating with borrowed money or when investing on margin. ---Where performance is relative, i.e. solely dependent on how the general market performed. ---When the capital holder is a trader and speculator with little patience for performance to bloom. From a book called "Value Investing a balanced approach" by Martin J. Whitman I have changed and added some things when I thought it clearly improved understanding or added value. Best Regards,
Paul A. Renaud.
