Value investing, as the words mean, is an investment that involves buying securities that are underpriced. It is basically an investment philosophy wherein an investor buys assets at a discount to their intrinsic value. The term was coined in 1949 by Benjamin Graham who is known as the father of value investing.
Siddharth Oberoi, founder, Prudent Equity, said that value investing is often described as the type of investing philosophy of identifying undervalued stocks. The goal is to choose stocks that are selling below their intrinsic value and have a margin of safety or room for error.
Value investors achieve abnormal returns by looking for bargains, typically those companies which are available at low P/E (Price to earning) ratios. The greatest challenge for a value investor is maintaining the required discipline.
A value investor may experience poor returns compared to other investors during the period of general overvaluation of market. Yet over the long period, value approach works perfectly.
An investor must be cautious while looking for bargains in the market. Companies with low P/E or P/B ratios are often depressed because the market price has already discounted the prospects of sharp fall in future earnings of the company. Companies in sector like Cement, Steel, textiles are the prime examples.
Siddharth Oberoi, however, said that value investing does not imply that stocks with high p/e ratios cannot be bought. Companies trading at high P/E’s too can be under-priced. However, the growth rate needs to be both – significantly higher and assured to justify a lofty P/E.