What is Value Investing

Stock investment is risky. You have to put in immense efforts and deep dive into market insights of various companies to pick the best performing stock. When you are asked to choose between best performing and undervalued stock, undoubtedly you will opt for the former.In opposition to this, many influential investors have selected less valued stocks that have helped them build massive wealth over a long period. Buying undervalued/overvalued stocks of prominent companies and holding them for a longer time is what value investment.

This is an investment where investors choose stocks of companies that are priced lower or higher than the actual intrinsic or inherent value. When you talk about value investing, one of the ardent followers of this investment strategy is the famous economist Warren Buffet.In value investing , investors either invest in the undervalued or overvalued stock of a company. An undervalued stock is the one that trades less than its intrinsic value. On the other hand, value investors also prefer putting money in overvalued stock, which usually trades higher than its original intrinsic valueTo start value investment, you have to find out the stock's intrinsic value and pay a lot less to buy the stock. Once you purchase the stock at the discounted price, you need to hold the asset till the time it reaches its actual value.

There are several reasons why a stock under-performs or loses its intrinsic value. One of the main reasons is short-term disappointment in terms of profitability, which affects stock's pricing profoundly. When the fall in share value is frequent, it creates a fear among investors that the cost will further decline, and they won't be able to realize any returns.However, value investors do not recognize this as a shortfall; they consider two things:

• Firstly, when a value investor decides to invest in an undervalued stock of a company, they usually have a long-term investment approach. According to them, the short-term profit disappointments is quite small as compared to the long-term returns an investor earns.
• Secondly, several value investors believe that disastrous profit fall often gets reversed over the long-term period.

In short, value investment seeks to exploit the rational behaviour of emotional investors.

To invest in the stock market, you need to understand what you are doing. This is especially crucial when you want to earn easy and high returns. As an investor, if you're looking to accumulate wealth through stock investment, then value investment is an ideal choice. Besides, the risk level is low.In today's age, when people want their investment to generate easy and quick returns, some people do not mind holding an asset for an extended period to earn substantial wealth. That's is possible through Value investment. Many think that this type of investment is dead. However, the fact is this investing is not practised the traditional way by today's investors.

1. Minimal risk: When you buy an undervalued stock of a company, the risk level is low. The stock is already suffering a price depreciation; thus, the risk component is comparatively small as against the performing stocks.
   To mitigate the risk, value investors use a strategy called the Margin of Safety. It means buying a stock at a low price than its particular limit. Therefore, even if they have made a wrong decision purchasing the shares, the losses aren't significant.
2. Substantial returns: Earning above average returns through value investing is why this strategy is popular among select investors. One cannot expect substantial earnings in the short term; rather, you need to stay put in stock for a long-term, which can be even one year. There is a correlation between the margin of Safety and substantial returns.For instance, at the time of investing in a stock, if intrinsic value is Rs.100 and it is trading at Rs.60. It means the difference of Rs.40 could still be your profit. This also indicates that you will earn a better advantage than the investors who bought the stock at the intrinsic value.
   Strategies that make Value Investing work
3. The margin of Safety: Value investors use this strategy to eliminate risks and losses. Under this, an investor safeguards investment by adding a Margin of Safety to the purchase price of a stock.
4. Look for Intrinsic value: To earn better returns, investors should know how to derive a stock's intrinsic value. You can calculate the value using valuation methods like the discounted cash flow analysis. When the market value of a stock is below the estimated value, it means value investors can purchase those stocks.
5. Avoid the herd mentality: One of the prudent habits you will ever come across in investment is herd mentality. When you know that an individual has realized good profits from by investing in a specific stock, investors tend to choose the same stock.To excel in value investment, you need to stay away from herd community and do not believe in group buying. That's the real essence of this investment. As Warren Buffet has rightly said, "Be greedy when others are fearful and be fearful when the others are greedy."

To conclude, value is an investment strategy that is a bit different from other plans. You need to have a thorough understanding of the stock market to excel in it.

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.