If you’re a serious investor, you have almost certainly heard of value investing. This investing strategy is arguably the most prominent and well-known investing strategy in the world. Value investors are among the most successful investors and their methods have been well-proven and well-studied. Consider that many consider Warren Buffet to be the greatest investor of all time. Warren Buffet is also a well-known value investor.
Warren Buffet isn’t the only value investor. His friend, Bill Gates, has also seen his wealth grow tremendously over the years. This growth has come even as Bill Gates has stepped away from Microsoft. Gates now spends most of his time and money working on non-profit issues. In order to raise more money for non-profit endeavors, Gates has remained a very active investor. Gates and his advisors use value investing as one of their the principle strategies.
So What is Value Investing
Obviously, some very big investors are value investors, but what exactly is their strategy? What makes them different from other investors? What is the underlying theory and how do value investors operate, and what specifically do they invest in?
As (almost) always, when trying to figure out what financial terms are, you should pay close attention to the terms themselves. Obviously, “value” investing then involves “value.” Specifically, value investors look for stocks and companies that they believe are under-valued. In other words, stocks are selling for a cheap price, or a company is willing to sell itself for a cheap price.
When you value invest, you have to find those companies that are selling for a low price. Often, you can find these companies in less than sexy industries. This helps explain why they are miss-priced in markets
Buffet’s first major investment, for example, was in Sanborn Maps, a map making company. This certainly isn’t the most glorious of fields, but Buffet was able to pick up shares for $45 a piece. However, he found that the book value of these shares was $65 dollars according to their book assets and other basic indicators.
A Short History of Value Investing
Warren Buffet did not actually found the value investing strategy. Instead, it was Benjamin Graham and David Dodd who formulated value investing. They were both professors at Columbia in New York City. These two introduced the idea of the “margin of safety”, which more or less calls for a cautious and defensive investing strategy. They formulated these thoughts during the 1930’s as the world was struggling with the Great Depression.
Value investors especially love to find investment opportunities that are undervalued according to their tangible assets and books. Some investors and economists assume that this never occurs, that markets accurately price things all the time. Warren Buffet and other investors, however, have discovered that markets are often miss-priced, even if for short periods of time.
By investing in things with low values, value investors can tap into rising asset prices as markets correct themselves.
Value Investing Is Evolving as Markets Evolve
Value investing was “easiest”, or at least most straight forward, when the value of a company could be based on its tangible assets, such as land, machinery, and other things that are relatively simple to assign value to. As the economy has shifted away from industrial production and towards a “knowledge” based economy, book values have become harder to determine.
That’s because many things that are valuable are also no longer tangible. For example, patents and trademarks are much harder to assign a “book” value to. Over time, accountants and other financial experts have figured out ways to value these assets, but it is more of an art than a science.
How To Invest In a Value Investing Fund
If you want to invest in value investing, but don’t know how to do it yourself, one option is to invest in a value investing fund. Professional value investors manage these funds. There are many funds that meet this description, such as the Copley, American Century, and others.
These funds generally offer pretty sizeable returns. Another option, if you have the money, is to invest in Warren Buffet’s Berkshire Hathaway investment company. A single share of Berkshire currently costs more than $200,000 dollars. This is obviously a huge sum, but Berkshire stocks have proven to be very effective investment opportunities for those who can afford them.
You can also set up your own stock portfolio and conduct your own trades. This means you’ll have to learn how to be a value investor yourself. This isn’t easy. However, if you want to be a successful investor, this value-based method is one of the most effective strategies in the world.
Now that you know the basics, you can start to dig into the numbers and learn how to identify your own value investments.