Value Investing Strategy Explained: Everything You Need to Know

Value investing is an investment technique used by most successful investors like Benjamin Graham to pick long term stocks. Read to know more about it.

By Will Courtney May 19 2021 6:19PM 2049 Read
How to Choose Long Term Stocks for Investment: Value Investment

Stock markets and investments are an intrinsic part of the economy. But not everyone is comfortable with the problematic terminology associated with investments. There are a plethora of terms that are used in stock marketing and investments. One of those crucial terms is 'Value Investing'. This term associated with Benjamin Graham and Warren Buffet is something worth knowing. So this article will look into all the particulars of this term.

Value Investing: Concept

Value investing refers to an investment strategy in which a person buys those stocks that are underestimated by the stock market, in his opinion.

Example of Value investing

Let's take the example of sale. We tend to purchase that item in a sale which we think is costlier than the offered price. We know that due to some reason, the seller has to reduce the price to persuade people to buy it. We take benefit of the situation and pick those items.

Value Investing in Stocks

Similarly, due to fluctuations in stock marketing, some stocks are sold at a price lower than their intrinsic value. As an investor, you understand that these are undervalued stocks, and you pick them up. This is what we call value investing.

How to Identify Value Stocks? Top Techniques

The following techniques are helpful in identifying value stocks:

1. Understand the Hidden value:

The hidden value refers to the hidden assets in a business that a seller failed to evaluate. For example, if you went to buy a purse worth Rs. 400 and found Rs. 500 inside it, this means that you have not only saved your money but gained from it. Similarly, when you look at the cash and market capitalizations of a company, and you find a huge gap in between, this can be a value stock for you.

Example: The best example to understand this is NBCC (India) Ltd. Its market capitalization is Rs. 2997 Crore, but its cash equivalent is almost Rs. 4832 crore, and that too without any long term debt. So you see, there is a hidden gap that the company failed to see, and therefore it can be a value stock.

Caution: Cash in the balance sheet is also a vital consideration for investment.

2. Growth parameter of the company:

Another vital technique to get value stocks is to look into the growth parameter of the company. Growth parameter means the expected growth of the country with regards to the present circumstances. Both qualitative and quantitative growth should be taken into account while looking for value stocks.

There are multiple types of growth parameters that can be used.

  • Earnings per share: The present share value and what the company earns from each share are vital factors for ascertaining the company's growth.
  • Revenue: Revenue refers to the total earnings of the company in a financial year.
  • Net profits: The profits saved by the company after paying all the expenses
  • Free Cash flow etc.

3. Understand the intrinsic value of the company:

Another vital consideration for identifying a value stock is to understand the intrinsic value of the company/business. This can be done through discounted cash flow analysis.

In DCF calculation, we take into account supply price, industry growth, competitive advantages and other such criteria to predict the future of the company. Although you can't land upon an exact number after this calculation, this method is beneficial because you will get a range of value for any company, which you can use to compare with the stock prices.

For example, if you get a value range of 1.2 to 1.5 Billion after DCF calculation, you can easily choose if you want to buy the business available at 0.7 Billion.

Value Investing: Top Books

Here is a list of a few books that can help you in learning value investing:

1. The Intelligent Investor – By: Benjamin Graham

Considered as one of the best books on investing, The Intelligent Investor focuses on different concepts to teach you to value investing.

Book Review

One of the most popular concepts introduced by this book is Mr. Market. The market is compared to a person who experiences both good and bad days, and it is upon the buyer to choose the right purchasing day or to neglect Mr. Market altogether.

In this way, the writer Benjamin Graham explains market fluctuations with easy-to-understand examples, making this book worth reading.

2. No Bull: My life in and out of markets – By: Michael Steinhardt

This book is based on the principle that a stock price is a reflector of market consensus. So if you want to learn value investing, you first have to believe differently from the crowd.

Book Review

The author of the book gives a four-step process to identify the right stocks:

  • Circle of Competence
  • Industry evaluation
  • Management evaluation
  • Value the business.

To get a clear picture of these concepts, you must read this wonderful book.

3. Value investing and Behavioral finance – By Parag Parikh

This book is one of the best books on value investing by an Indian author. The book explains various concepts about investment in the Indian market through its 12 well-structured chapters. So if you want to gain insights into Indian value investing, this book is worth reading.

Best Value Stocks in India:

Some of the best value stocks in India are:

  • Sonata Software Ltd. An IT service provider, Sonata Software Ltd. specializes in IT consultancy, product Engineering, business development and much more. It has a stronghold in the Indian market and deals with prominent companies like Oracle, Microsoft, IBM, etc. Since it derives maximum revenue from overseas, the growth in revenue and profit is expected to be over 17% over 5 years.
  • Avanti Feeds Ltd. Dealing in shrimp sale and export, Avanti feed manufacturers has a stronghold in the domestic feed business. It has a healthy cash balance of rupees 72 crores with negligible debts. The only risk is a Disease outbreak in shrimps.
  • Oracle Financial services software Ltd. Experienced in providing IT services to financial companies, Oracle Financial service is also a prominent value stock. It has a strong global presence with a zero debt risk profile. But the COVID pandemic harmed this company.
Final Value Thought

So, this was all about the value investing strategy used famously by Benjamin Graham and Warren Buffet. Value investing is a vital factor in stock marketing, and a better understanding of this concept can help you make informed decisions.

Will Courtney
Will Courtney View More Posts

I am the founder of First Point Design & a behavior design instructor at the Cox School of Business at Southern Methodist University and has more than twenty years of behavior insights experience working with Fortune 50 companies to solve their most important behavior challenges. I am an expert in applying behavior science to marketing. I live in Dallas with my wife and family.

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