What Is Value Investing?
Value investing means buying good companies for less than they are really worth, then waiting for the market to notice. Warren Buffett is its most famous follower.
The core ideas
- A stock is a piece of a real business, not just a price on a screen.
- Estimate what the business is worth: its intrinsic value.
- Buy only well below that value, with a margin of safety.
- Be patient. The market can stay wrong for a long time.
How value investors look for stocks
They often look for low P/E or price-to-book ratios, strong free cash flow and little debt. Buffett later added that it is better to buy a wonderful company at a fair price than a fair company at a wonderful price.
The risks
Cheap stocks can stay cheap or get cheaper if the business is shrinking. This is called a value trap. Value investing can also lag for years when fast-growing companies lead the market.
See it in real companies
Open a company to see what it sells and how it makes money.
Related terms
Intrinsic valueWhat a business is really worth.
Margin of safetyBuying well below what you think it is worth.
Growth vs value stocksFast growers versus cheap, steady companies.
Undervalued vs overvaluedWhen the price is below or above the real value.
Economic moatWhat protects a company from competitors.
Buy and holdBuying good investments and keeping them for years.