Significance of Value Investing?

Value investing is built around the paradigm that stocks have an innately intrinsic and inherent value (represented by a concrete number), which is arrived using certain fundamental analyses. The underlying notion is to identify those stocks which are undervalued by the market. The approach believes that the market will re-evaluate the prices of the value stocks in the future, thereby re-adjusting the price to its real value.

One of the fundamental guidance for value investing is identification of a margin of safety from the perspective of a stock price. For e.g., a value investor seeking a 15% margin of safety will identify a stock which is marked at an intrinsic value of $100 but will buy it when the price touches $85. He will potentially sell it when the price touches $100.

Brought into the fore by Benjamin Graham, who is considered as the Father of Value Investing, perhaps the greatest proponent of the concept has been his one-time student, Warren Buffett.

Effective execution of value investing can generate credible returns. A holistic mix of value and growth investing in a diversified portfolio can aid investors to gain access to big winners whilst weathering bear markets. With the emphasis on the power of ‘compound interest’, value stocks can deliver in the long term, as most of them offer significant dividends.

A value investor is noted by his immense deal of patience, as he must await the market to assimilate the real value of a stock. Hence, possessing a long-term investment horizon and a contrarian mindset are quintessential for this investment approach.