What Is Value Investing? Alpha Architect

Value Investing is an investment approach where an investor chooses stocks that are undervalued in the market. Value investors identify stocks that are traded less than their actual value and earn profit based on the market’s un-productivity. Yes, you heard that right! But how does value investing work? How does it benefit investors? Read on to know.


How Does Value Investing Work?

The main principle behind value investing is, keep an eye on the stock market, buy stocks when they are un-valued, and sell them when they reach their intrinsic value. The investors also allow for a margin of safety while trading in value investing. 

 

Suppose there is a company that is believed to perform extremely well in the future as per the market. In that case, it is possible that its share price will increase from $100 to $120. It will also influence the market into increasing its demand and price even from $120. 

 

Later, it is found that the company has an average financial structure that doesn’t stand up to such expectations. Thus, its intrinsic value is found at $80, which means it is overvalued. Value investors don’t take into account such trends for company stocks and go for the ones that have long-term fundamentals.

 

In a nutshell, here is how value investing works-

  • Know the intrinsic value of the stocks.
  • Find the margin of safety.
  • Step away from the herd mentality and understand the true value of a stock.

 

How Does Value Investing Benefit Investors?

Below are the two main benefits of value investing-

 

Reduced Risk

Investing in equity shares involves a high risk due to market fluctuations. With value investing, investors reduce the risk by considering undervalued stocks. So, they can buy potent shares at lower prices or sales. When these shares reach their intrinsic price or go higher, the investors earn capital gains.

 

Top value investors calculate the margin of safety to reduce the effect of associated risk, i.e., they buy a share when its price is than a specific limit. This way, there won’t be a significant loss even if they are wrong about a company's future growth.

 

Above-Average Returns

Value investing provides you with great returns in the long run if you employ a margin of safety, as discussed above. In addition, you need to consider metrics, like P/E ratio, EBIT, etc., analyse a company properly, and find its intrinsic value to reduce the potential risk and earn substantial profits.

 

If you are interested in value investing, you can seek help from Alpha Architect, where professional investors aim to empower investors through the right finance education. They will let you know the best investing strategies at lower costs and help you earn maximum profits on your investment.


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