{"id":955,"date":"2010-10-16T20:39:00","date_gmt":"2010-10-17T00:39:00","guid":{"rendered":"http:\/\/thestockmarketwatch.com\/learn-stock-market\/?p=955"},"modified":"2016-04-26T14:44:18","modified_gmt":"2016-04-26T18:44:18","slug":"stock-picking-strategy-value-investing","status":"publish","type":"post","link":"https:\/\/www2.stockmarketwatch.com\/learn\/stock-picking-strategy-value-investing\/","title":{"rendered":"04) Stock Picking Strategies: Value Investing"},"content":{"rendered":"

Columbia University Professors Benjamin Graham and David Dodd pioneered the strategy of the value investing method during the 1930’s.\u00a0 The concept of value investing is to find companies trading below their inherent worth.<\/p>\n

Value investors look for companies that are mistakenly undervalued by the market.\u00a0 They look for stocks with strong fundamentals such as earnings, dividends, book value and cash flow.\u00a0 These companies are sometimes sold at bargain prices despite their quality.\u00a0 Value investors see potential in these stocks and waits for the market to correct the valuation of these stocks.<\/p>\n

Value & Quality<\/strong><\/p>\n

Value investors look for bargain prices but don\u2019t just buy any stock that is cheap.\u00a0 Value investors have to do a lot of research to make sure that they get a company with quality and potential and not just “junk”.<\/p>\n

It is important to understand the difference between a value company and a company that is in decline. For example, Company A sells its stock for $25 per share and then suddenly drops at $10 per share.\u00a0 This decline does not automatically mean that it is a good bargain.\u00a0 Remember that there are a lot of factors which could affect a company’s market price.\u00a0 In order for a company to be a good bargain,\u00a0 a company must have fundamental worth healthy enough to be worth more than its intrinsic value. Value investing is about intrinsic value and not historic price.<\/p>\n

To take a look at value investing, take a look at Warren buffet.\u00a0 In 1967 his company Berkshire Hathaway was trading at $12 and at 2002 it was at 70,900!\u00a0 This is real value investing!<\/p>\n

Buying A Business Not Stock<\/strong><\/p>\n

For value investors, they are buying a business not stock.\u00a0 When they trade, they see it as becoming the owner of a quality company.\u00a0 They like to pay more attention to the worth of an underlying asset.\u00a0 They don\u2019t see volatility and price fluctuations to be a factor in the value of the business in the long run.<\/p>\n

Contradictions<\/strong><\/p>\n

Value investors usually do not pay heed to the volatility of the stock market.\u00a0 The effective market hypothesis (EMH) states that if all prices are reflecting all relevant information, then they are already showing the intrinsic value of companies.\u00a0 For value investors, the opposite of EMH is true.\u00a0 They look for time so inefficiency where the market mistakenly valuates a stock.<\/p>\n

They disagree that in a time of high volatility or beta, a drop in stock prices mean that Armageddon is upon us.\u00a0 Volatility does not mean that a stock is automatically risky.\u00a0 If a company has an intrinsic value of $20 and trades at $15, this could potentially be a good bargain.\u00a0 If it drops to $10 per share then the company is experiencing an increase in beta therefore, investors would see this stock as high risk.\u00a0 But for value investors, they would see the decline as an even better bargain, therefore the lower the risk.\u00a0 Volatile market conditions do not scare off value investors. In fact, they see this as a good thing.<\/p>\n

Screening for Value Stocks<\/strong><\/p>\n

Here are some of the qualities of value stocks:<\/p>\n

Qualitative aspects<\/p>\n