A value investment strategy is focused on purchase of securities trading at a discount to a reasonable estimate of their intrinsic value. While the process of determining intrinsic value certainly varies depending upon the practitioner, most share common beliefs and characteristics:
- The market is not efficient. Value does not equal price.
- A value investor regards a stock as part ownership of an operational business, not merely a symbol to be traded.
- Value investors believe time spent forecasting and predicting the future and market direction is wasted time.
- A long term investment horizon is essential.
- A belief that risk is the potential for permanent impairment of value. Risk cannot be captured in one number (such as standard deviation).
- An unwillingness to participate in market fads.
- Value investors tend to be contrarian.
- Value investors focus on business fundamentals.
- Successful value investors remove all emotion from their investment process and attempt to take advantage of ‘Mr Markets periodic irrationality.’
In general value investments fall into one of three categories:
- A discount to asset value.
- A discount to earnings power value.
- A discount to the value of growth within franchise.
Value investors look for opportunity across the capital structure and do not confine themselves to equity or bond silos.
In summary: Value in relation to price, not price alone, must determine investment decisions.
For a fuller explanation of value investment, read two of the seminal texts on the subject:
Margin of Safety, Seth Klarman, 1991.
Security Analysis, Ben Graham and David Dodd. First published in 1934.
