Value Investing :What it is and why you should do it ?

"Price is what you pay. Value is what you get." -  Warren Buffett

Investing is very dicey topic especially in today's world when lots of information keeps flowing around; be it online, on television , newspaper, or any other media source. Primary objective of investing is capital creation and thereby increase income generating assets. Stock market/Equities come to our mind when we think about investing in risky asset. Stock market has fascinated everyone, but not everyone has been able to make money out of it.

Two things can be done in Stock Market : Trading or Investing

Time and again it has always been proved that it is the investor who makes money and not the traders in the long-term.The logic is very simple, to be successful in trading your decisions are bound to be correct day in & day out or more frequently which is highly unlikely as the market is not structured in such a manner. The odds are stacked in the favour of market and not in favour of trader. Investing on other hand has a greater probability of yielding success as the number of decisions to be taken are less frequent in nature.

What is VALUE INVESTING ?

"Value Investing is the strategy of selecting stocks that trade for less than their intrinsic values" as defined by Investopedia. 

In simple terms if we understand value investing, it is paying less than fair value for a stock. The concept was introduced by Benjamin Graham, also known as the father of value investing. It involves actively searching stocks of companies that are believed to be undervalued or available at discounted rate on the basis of various simple parameters like Book value (Net worth) , P/E Ratio , discounting of future expected cash flow,  market cap to sales , cash by market cap etc.

The difference between discounted value and fair value can be called "Margin of Safety". It protects investor from errors involved in judgment of fair value, provides high-return opportunities and minimizes the downside risk of an investment. Value investing can provide good profits once the market inevitably re-evaluates the stock and raises its price to fair value over a period of time.

Determination of VALUE is an important aspect of stock selection.Financial parameters like return on equity, return on assets , operating profit margin , debt to equity ratio , promoters holding etc help in determining whether underlying stock has some value or not. Qualitative characteristics like  Business model, history of promoters, sector performance etc also help in determining whether there is value in the stock of the company.

Why you should do it ?

Value investing is a timeless principle and has proven to be very successful over a period of last 8-9 decades. Warren Buffett, World's No 1 successful equity investor firmly follows the principle and owes his wealth to the same. The benefits definitely out weigh the negatives of the strategy as the nature of strategy is "Defensive". It's better to take a calculated risk with value investing rather than blind risk while investing in capital markets.

Good Day !! :)