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Value Investing
Value investing is an investment style following the strategy from the so-called “Graham & Dodd” School. Followers of this style are also known as value investors. They tend to buy companies whose shares seem under-priced according to some forms of fundamental analysis. The analysis may include shares that have high dividend yields or low price-to-earning ratios.
Benjamin Graham and David Dodd were both professors at Columbia University. Both of these professors wrote a book called Security Analysis, which was first published in 1934. They had taught many famous investors. Both of these investors advocate a cautionary approach to investing in stocks. In terms of choosing which stocks to invest in, they recommend investors to choose defensive investment in stocks trading.
The main proponent of value investing is to buy stocks at less than their real value. The discount in the market price to the real value is what Benjamin Graham refers to as the “margin of safety.” However safe it may seem, it is good to keep in mind that the future distributions and the appropriate discount rate can only, at best, be assumptions. To further the concept, Warren Buffet has evolved the theory to where, in the last twenty-five years or so, he has been focusing on “finding an outstanding company at a sensible price” rather than just focusing on so-so, generic companies at a discounted price.
In the past, value investing has proved to be a successful investing method. There is a number of ways to evaluate its success. One way to do so is by looking at the performance of simple value strategies such as purchasing low PE ratio stocks, or low price-to-book ratio stocks. Many academics have published numerous studies that investigate the effects of buying value stocks. These studies have shown that value stocks have outperformed growth stocks and the overall market.
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