- Value Investing [www8.gsb.columbia.edu]
- B8377-001 [www8.gsb.columbia.edu]
- Investing For Grown Ups? Value Investing [stern.nyu.edu]
- Value Investing: Going Where The Action Isn't [news.fordham.edu]
Value investing is an investment paradigm that derives from the ideas on investment that Ben Graham and David Dodd began teaching at Columbia Business School in 1928 and subsequently developed in their 1934 text Security Analysis. Although value investing has taken many forms since its inception, it generally involves buying securities that appear underpriced by some form of fundamental analysis. As examples, such securities may be stock in public companies that trade at discounts to book value or tangible book value, have high dividend yields, have low price-to-earning multiples or have low price-to-book ratios.
Understanding the concept of Value Investing
Value Investing is the act of buying an undervalued asset with the intention of selling it at a profitable margin in the future. Value investors are individuals who actively seek securities that are being sold at a price which is significantly less than their actual intrinsic worth.
The concept of value investing was derived from the ideas of David Dodd and Ben Graham in the early 20th century. Although the idea has greatly evolved with time, and is now very different to what it was initially, the basic principles still remain the same. Value investing is widely practiced by companies, as well as individuals, in hopes of gaining monetary benefits.
A fundamental concept of value investing is buying stocks and assets, whose values are anticipated to appreciate in the near future. The idea is so basic that many consumers might be practicing value investment without even knowing they do so.
For example, people may buy heaters in the summer months when their demand is low (and so is price) instead of purchasing the same appliance during the winter when it has a higher monetary value. Buying an item from a sale, at a discounted price, is another example of value investing.
The difference between Value Investing and Growth Investing
Most people confuse the concept of value investing with that of growth investing. While both forms of investment yield profits for the investor, they are not the same.
Growth investing happens when an investor purchases an asset with a long term investment in mind, knowing that the value of the asset will appreciate in the coming years due to economic growth. A perfect example for this is real estate investment— an investor plans to purchase a house that is likely to increase in value rather than decrease.
On the other, value investing happens when an individual buys an asset that does not necessarily promise steady growth over the years, rather something which is temporarily priced at a lower value than it’s actual worth e.g. buying currency that is temporarily undervalued to an economic crisis, but is expected to return to its original worth, soon.