Value Investing Report
INTRODUCTION
In the modern day, it is crucial to comprehend the theories and concepts relating to value investing.
Undoubtedly, there are new investing methods and ideas developing nowadays. As a result, it's
crucial for investors who wished to make a big profit from their investments to react to the new
information.
1. In 1995, J.K. Rowling finished the first draft of Harry Potter and the Philosopher's Stone and
sent it to 12 publishers, all of whom declined to publish it. Those publishers would
eventually regret passing on the chance to support an up-and-coming novelist who would
someday rule the globe.
2. Value equities strategies, which concentrate on inexpensive businesses that face
controversy but have strong long-term prospects, have recently been rejected by many
investors around the world. We think that many investors now run the danger of losing a
historic chance to invest against the tide in inexpensively valued firms all around the world,
much like the publishers who passed on Harry Potter. Value investors have made money
for years by finding chances in undervalued stocks. Since the start of the financial crisis in
2008, the most attractively valued equities on the international markets have fallen as
investors moved to safer investments and away from the highest - risk stocks.
WHO IS BENJAMIN GRAHAM? (EXPLANATION)
By simply carefully analyzing firms, he was able to accumulate significant money while reducing his
risks due to this brilliant strategy for investing in shares.
WHAT IS VALUE INVESTING? (EXPLANATION)
1. According to Hayes (2020), choosing stocks that appear to be trading for less than their
intrinsic or book value is part of this investment strategy. Value investors hunt down stocks
that they believe the stock market is undervaluing. They contend that the market overreacts
to both positive and negative news, causing stock price fluctuations that are inconsistent
with a company's long-term fundamentals. The overreaction presents a chance to make
money by purchasing equities at a discount—on sale.
2. Academics have largely come to the conclusion that value investing strategies outperform
growth investment strategies on average, based on the weight of the evidence from
research on the book-to-market effect and related anomalies. However, there is far less
agreement over the underlying causes of the higher returns. Fama and French (1992)
adopted the efficient market theory and claimed that value strategies' better returns were
caused by their higher risk. It is proposed that the benefits of value investing were caused
by psychological biases that underlie investor behavior and the agency costs of
professional investment management. Academic research on value investing has
significantly influenced the field of professional investment management. Value investing is
now a well-known particular specialization that money managers have adopted
HOW DOES VALUE INVESTING WORKS? (EXPLANATION)
1. Most people would concur that you receive the same TV with the same screen size and
picture quality whether you get a new TV on sale or at full price.
2. Savvy value investors think that stocks operate in the same way as smart consumers would
claim that it makes no sense to buy full price for a TV since TVs go on sale numerous times
a year. Naturally, unlike televisions, stocks won't be on sale during cyclical periods like
Black Friday, and their discount prices won't be publicized.
Value investing is the practice of conducting research to identify these hidden stock sales and
purchasing them at a discount from their market value. Investors may receive substantial payouts for
long-term purchases and holdings of certain value equities.
INTRINSIC VALUE AND VALUE INVESTING (EXPLANATION)
When a company's shares are undervalued, it is the equivalent of a stock being cheap or discounted
in the stock market. Value investors anticipate making money on shares they believe to be
significantly undervalued. To determine a stock's valuation or intrinsic value, investors employ a
variety of indicators.
WHAT IS INTRINSIC VALUE? (EXPLANATION)
Based on the cash flows from an investment, intrinsic value calculates its worth. In contrast to market
value, which indicates the amount buyers are prepared to pay for an asset, intrinsic value illustrates
the asset's value based on an examination of its actual financial performance.
THE DIFFERENCE BETWEEN INTRINSIC AND VALUE INVESTING?
According to Maverick, J.B. (2022), though both are methods of assessing a company, there is a
substantial distinction between intrinsic value and value investing. Value investing is merely a
measurement of the company's perceived worth in the marketplace or the price at which it would be
acquired. For publicly traded organizations, determining value investing is simple, but it can be a little
trickier for privately held businesses. A determination of a company's true worth independent of how
the market perceives it is known as intrinsic value. Investors in value seek out businesses with better
intrinsic values than their value investing. They consider this to be a worthwhile investment. (NOT
SURE)
SOME METRICS USED TO VALUE A COMPANY'S STOCK INCLUDE:
Price-to-Book - Assuming the company is not experiencing financial difficulties, the stock is
undervalued if the price is lower than the value of the assets. According to Fernando, Jason (2022)
Companies use the price-to-book ratio (P/B ratio) to compare a firm's market capitalization to its
book value. It's calculated by dividing the company's stock price per share by its book value per
share (BVPS). An asset's book value is equal to its carrying value on the balance sheet, and
companies calculate it by netting the asset against its accumulated depreciation .
The P/B ratio measures the market's valuation of a company relative to its book value.
The market value of equity is typically higher than the book value of a company.
P/B ratio is used by value investors to identify potential investments.
P/B ratios under 1 are typically considered solid investments.
Formula and Calculation of the Price-to-Book (P/B) Ratio
In this equation, book value per share is calculated as follows: (total assets - total liabilities) / number
of shares outstanding). Market value per share is obtained by simply looking at the share price quote
in the market.
P/B Ratio=Market Price per share/Book Value per share
A lower P/B ratio could mean the stock is undervalued. However, it could also mean something is
fundamentally wrong with the company. As with most ratios, this varies by industry. The P/B ratio
also indicates whether you're paying too much for what would remain if the company went bankrupt
immediately.
Example: Assume that a company has $100 million in assets on the balance sheet and $75 million
in liabilities. The book value of that company would be calculated simply as $25 million ($100M -
$75M). If there are 10 million shares outstanding, each share would represent $2.50 of book value. If
the share price is $5, then the P/B ratio would be 2x (5 / 2.50). This illustrates that the market price is
valued at twice its book value.
Price-to-earnings (P/E), - The price-to-earnings ratio is the ratio for valuing a company that
measures its current share price relative to its earnings per share (EPS). The price-to-earnings ratio
is also sometimes known as the price multiple or the earnings multiple.
P/E ratios are used by investors and analysts to determine the relative value of a company's
shares in an apples-to-apples comparison. It can also be used to compare a company against
its own historical record or to compare aggregate markets against one another or over time.
P/E may be estimated on a trailing (backward-looking) or forward (projected) basis.
Formula: The formula and calculation used for this process are as follows.
P/E Ratio = Market value per share / Earnings per share
Example: As a historical example, let's calculate the P/E ratio for Walmart Inc. (WMT) as of Feb. 3,
2021, when the company's stock price closed at $139.55. The company's earnings per share for the
fiscal year ending Jan. 31, 2021, was $4.75, according to The Wall Street Journal.
Therefore, Walmart's P/E ratio was:
$139.55 / $4.75 = 29.38
FREE CASH FLOW - Free cash flow is the money that is left over after all costs have been covered,
including capital expenditures, which include substantial acquisitions of assets like equipment or the
expansion of a manufacturing facility. If a corporation is producing free cash flow, it will have extra
funds to repurchase shares of stock, pay dividends to shareholders, pay down debt, and invest in the
company's future.
In addition, there are several other metrics that are also considered in the research, such as the
growth of sales, debt, equity, and revenue. If the comparative value—the stock's current price in
relation to the company's underlying value—is seen to be favorable after considering these
indicators, the value investor may choose to buy shares.
MARGIN OF SAFETY - The margin of safety theory is based on the idea that buying stocks at a
discount increases your chances of making money when you sell them later. It is one of the keys to
effective value investing. If the stock doesn't perform as you had anticipated, you are also less likely
to lose money due to the margin of safety.
For example, Value investors employ a similar strategy. Waiting for a stock's price to increase to its
genuine value of $100 will result in a profit of $34 if it is worth $100 and you purchase it for $66.
Additionally, there's a chance that the business will develop and increase in value, providing you an
opportunity to earn even more money. You will profit $44 if the stock price increases to $110
because you purchased it at a discount. You would only have made a $10 profit if you had paid the
full $100 price for it. The founder of value investing, Benjamin Graham, only purchased companies
when their prices were two-thirds or less of their true value. He believed that this level of safety was
required to maximize rewards while avoiding investment risk. For value investors seeking for
investing opportunities, the margin of safety increases as the gap between intrinsic value and the
stock price rises. Because not every value stock will turn its business around successfully, that
margin of safety is important for value investors to minimize their losses when they're wrong about a
company.
BEHAVIOURAL OBSTACLES TO VALUE INVESTMENTS (analysts, market watchers and friends)
There will be unfavorable news regarding possible default, management unrest, and unsuccessful
business tactics at the businesses you own. In fact, the price of the stock may drop for a considerable
amount of time after you purchase it as other investors quit up. Many investors who use this method
end up selling their investments before they should because they are unable to hang onto the equities
in the face of the constant stream of bad news.
DON’T FOLLOW THE HERD
In addition to rejecting the efficient-market idea, they frequently sell or remain silent while everyone
else is buying. They buy or hold when everyone else is selling. Because hot stocks are often
overvalued, value investors should invest in less well-known companies if the financials look good.
They also reevaluate well-known firms' stocks when their prices have fallen because they think these
businesses can bounce back from setbacks if their fundamentals are sound and their goods and
services are still of high quality.
VALUE INVESTORS ONLY CARE ABOUT A STOCK’S INTRINSIC VALUE
They consider purchasing a stock for what it really is: an ownership in a firm. Regardless of what
other people are doing or saying, they want to own businesses that they are confident have strong
principles and financials.
VALUE INVESTING REQUIRES DILIGENCE & PATIENCE
When two investors examine the exact same information on a company's valuation, they may reach
different conclusions.
Some investors don't have a lot of faith in forecasting future growth because they simply look at the
current financials. Other value investors concentrate mostly on a company's projected future growth
and cash flows. The well-known value investment gurus Warren Buffett and Peter Lynch, who
oversaw Fidelity Investment's Magellan Fund for a while, are both known for examining financial
statements and valuation multiples in order to spot instances where the market has mispriced stocks.
Some investors also combine the two strategies.
Despite many strategies, the fundamental idea of value investing is to buy assets for less than they
are currently worth, hold them for a long time, and make money when they rise to or above their true
value. It doesn't offer immediate satisfaction. You cannot anticipate purchasing a stock on Tuesday
for $50 and selling it for $100 on Thursday. Instead, you might have to wait years for your stock
investments to start paying off, and you might even experience some financial losses. The good news
is that long-term capital gains are taxed at a lower rate than short-term investment gains for the
majority of investors.
As with all investment methods, you must have the perseverance and determination to adhere to your
investment guiding principles. Even though the fundamentals of some stocks are strong, you may
want to wait if they are expensive. If no stocks suit your criteria, you'll have to wait and let your money
sit idle until an opportunity presents itself. You'll want to buy the stock that is currently priced most
attractively.
