What is value investing?

Imagine you are shopping for Tibetan artefacts in Delhi's bustling Janpath market. After visiting a few shops, you stumble upon a genuine antique that is marked at a fraction of its real value. You waste no time in stealing the deal. Later, you head to the posh Khan Market to meet a friend over dinner. To your disbelief, a gourmet restaurant has priced one of its famous meals at fast-food prices! Again, you grab the chance to savour the delight.

In both instances, you knew what the items were truly worth, bought them at a bargain, and enjoyed the experience. That's essentially what value investing is all about.

The definition of value investing

Value investing is a common-sense approach to investing that boils down to buying quality stocks that are undervalued. An undervalued stock is one whose market price is less than its intrinsic value, i.e., the underlying business' real worth.

There are many ways to determine quality and intrinsic value, which leads to many definitions of value investing. But value investors usually have a few common characteristics:

• They have a long-term horizon (measured in years, not days or months)
  
• They are indifferent to market direction and the momentum of stock prices
  
• They stay away from sentiment-driven or popular stocks.

What does it take to be a successful value investor?

1. Focus on expertise: You must know where your expertise is and focus only on those areas. For instance, if you don't know how to evaluate banks, then you should not be investing in banks.

2. Patience: Value investing will test your patience. It demands waiting for the right opportunities and holding investments until the market recognises their true value.

3. In-depth analysis: You must thoroughly analyse companies to distinguish between genuinely undervalued stocks and those that are merely cheap.

Many successful investors, including Benjamin Graham, Walter Schloss, Warren Buffett, Charlie Munger, and Howard Marks, are proponents of value investing.

'All good investing is value investing'

Over the years, value investing has developed and changed many forms. But it will never go out of style.

Here is what the late legendary investor Charlie Munger said in 2021: "Value investing will never go out of style. Because value investing - the way I conceive it - is always wanting to get more value than you pay for when you buy a stock. That approach will never go out of style. Some people think that value investing is you chase companies that have a lot of cash and they're in a lousy business or something. I don't define that as value investing. I think all good investing is value investing. It's just that some people look for values in strong companies and some look for values in weak companies. Every value investor tries to get more value than he pays for."

Your takeaway

At its core, value investing requires investors to be patient and disciplined. This approach can help them generate substantial returns over time. At Value Research, it is our way of life. All our services have been designed with this in mind. If you feel this is the right approach for you, let us empower you to become a better investor.

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