Value investing is an investment style or approach, or investment paradigm as it is termed in the field. Value investing was derived from the ideas and principles of investment that David Dodd and Ben Graham came up with. They taught the principles of value investing at Columbia Business School starting from 1928 and in 1934 they developed the ideas and published them in the book Security Analysis. As it can be expected, value investing went through various shapes and forms depending on how everyone wanted to interpret it, but the basic idea is that one purchases securities whose shares are, after a fundamental analysis, under-priced. Unless you have any idea or small experience with investments, the previous phrase might have left you bewildered.
In order to better understand value investing, we must understand what these securities are and what a fundamental analysis is. First of all, securities can refer to any financial instruments that are guaranteed by physical assets. However, in some parts of the world, like North America, securities refer to any financial investments whether they are actually secure or not. Thus, securities can be: debt securities like banknotes and bonds, equity securities such as common stocks and last but not least, derivative contracts. The company owning the securities is the issuer and these securities can be in a material form, like a certificate, or of an electronic form like a book entry.
Secondly, in order to understand value investing we must see what a fundamental analysis is. Well, when applied to a business, a fundamental analysis means you analyze that business’ health and financial statements, comparing it to its competitors and seeing where it stands on the market. The fundamental analysis will be differently approached depending on the type of company or business you are interested it, but it will always be based on data from the past as well as present data, in order to get a more comprehensive view of the company’s status.
Many successful businesspeople and investors have stated that the whole catch of value investing is to buy stocks at a price lower than their actual, general value. Thus, if a company has a bit of a bad day or week, smart investors can quickly purchase cheaper stocks and find themselves in the possession of a profit when the company gets back on track. This, of course, is quite a risky investment and it can have disastrous effect on the portfolio of some inexperienced investor.