Value investing was created more than 100 years ago but the philosophy of it goes beyond 100 years. Today it has become a fad in the modern investing world. It was started by Benjamin Graham, and Warren Buffet made it famous. But what exactly is Value investing. It is an art of finding companies in the stock market whose intrinsic value are above their market price. We will dig more into the definition of it. Before that let us see the basics of investing.

Investing is putting your money into some financial assets. The purpose of investing is to make profits for majority of us , and for some it could be for preserving wealth.. Fundamentally speaking profit is achieved by selling at price higher than the buying price.

Formula for profit is,
Profit=Selling price-Buying price
where Selling price>buying price.

Technically, the term Value investing in stock market is defined as a strategy to find a stock which is available in the market below its intrinsic value. Intrinsic value is true value. Let us see the definition with an example.
Company X is trading at current price of 100 and its intrinsic value is 150, this means that the X is trading below its intrinsic value, this is known as undervalued stock. On the other hand the intrinsic value could be 50 and it is then trading above its intrinsic value, this is know as overvalued stock. There is catch here though, the market does not tell us when the intrinsic value will be realised. Also there are many other factors and market forces that comes into play when determining the intrinsic value. This is topic for another post.

One of the most important parameter in Value investing is the Margin of safety. In the previous example we know that the intrinsic value of company X is 150 and the current price is 100. Here the margin of safety is of 50 i.e 1/3rd or 33%. The more the margin of safety the better it is. We don’t want to buy a stock whose margin of safety is low based on its intrinsic value and current price. The best analogy used to explain this we don’t want to sit on chair that cannot carry our weight, it is will fall. We want to sit on a chair that is sturdy enough to carry more than our weight.

There are number of ways to calculate the Intrinsic value. DCF or discounted cash flow analysis is one of the most used methods. Value investing requires basic valuation skills and a high level of discipline. You too can become a Value investor if you have the above knowledge and the right temperament. We will discuss more on the various types of Valuation topics in the coming posts. I hope you liked the article.