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What Is Value Investing

Buy the gap between share price and intrinsic value. (opens in new tab) (opens in new tab) (opens in new tab) Newsletter sign up Newsletter (Image credit: Getty Images) By Kiplinger Staff published 11 October 2022 When you start investing, one of the first concepts you're likely to encounter is "value investing". Like many terms in investment, "value" is not easy to pin down precisely. As Charlie Munger, the business partner of famous US investor Warren Buffett, put it: "All investment is value investment, in the sense that you're always trying to get better prospects than you're paying for." This is true, but not very helpful. So let's be more specific. At the heart of value investing lies the idea that a company's share price is often very different to its "intrinsic value". This disparity is often driven by market mood swings rather than rational analysis. So a value investor calculates the "intrinsic value" of a company, and then looks to invest when its share price is below that.

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Profit and prosper with the best of Kiplinger's expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail. Profit and prosper with the best of Kiplinger's expert advice - straight to your e-mail. Sign up A value investor also looks for a "margin of safety". That is, they want to invest when the company is not just a little bit, but a great deal cheaper than its intrinsic value, in case their assumptions are wrong. How do you calculate intrinsic value? By analyzing a company's accounts. Traditionally, value investors look particularly closely at the assets on a company's balance sheet – its book value. The idea is that if a company trades for a lot less than the value of the assets it owns, then in theory, you could buy the company, shut it down, sell all its assets, and still profit. There are two big risks for value investors. One is that they buy companies which will never regain their past glory. For example, some companies only look cheap because their business models have been destroyed by new technology. These are known as "value traps". The second risk is summed up in the apocryphal quote from John Maynard Keynes, who as well as being the 20th century's most famous economist, was also a brilliant investor. As Keynes said: "The market can remain irrational for longer than you can remain solvent." In other words, sometimes even good quality value stocks remain out of favor for longer than the average investor can endure holding onto them, in the face of massive underperformance. This highlights the most important trait for the value investor: patience. For more on value investing, sign up for our Investing Weekly e-newsletter. Kiplinger Staff Latest 4 Ways You Can Take Advantage of a Down Market With markets down for the year, it may seem that all the news is bad. But now could be a good time to make some profitable moves. By Adam Grealish • Published 11 November 22 New, Used or Leased: Is Now the Time to Buy an Electric Vehicle? The Inflation Reduction Act created new tax breaks for electric vehicles. Here's a guide to which EVs count and the best time to buy. By Rivan V. Stinson • Published 11 November 22 kiplinger About Us (opens in new tab) Terms and Conditions (opens in new tab) Privacy Policy (opens in new tab) Cookie Policy (opens in new tab) Kiplinger is part of Future plc, an international media group and leading digital publisher. Visit our corporate site.
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