What is 'Value Investing'?

Investors the world over have suffered huge losses in the current global financial crises, the impact of which has been catastrophic. Most of the countries in the developed world have slipped into a recession. Indian stock markets have also been negatively impacted by the global crises. Investors in India are a worried lot. To make money on the markets we need to understand the concept of 'Value Investing'.

This concept has been developed by ‘Benjamin Graham’ and ‘David Dodd’ in the 1930’s, and has been put to practice by many of their students, notable amongst them being the legendary billionaire Warren Buffet, Chairman and founder of Berkshire Hathaway.Value investing generally involves buying securities that appear underpriced by some yardstick of ‘Fundamental Analysis’. These securities may be stocks in public companies that trade at discounts to book value, have high dividend yields, have low price to earning multiple (PE ratio) or have low price to book ratio. According to Buffet value investing is buying stocks at less than their ‘Intrinsic value’. However, finding the ‘Intrinsic value’ of a stock is not an easy task. There is an element of subjectivity in arriving at the true intrinsic value of a stock. To overtcome this drawback, another important concept in value investing is that of ‘margin of safety’. The discount of the market price to the intrinsic value is called the ‘margin of safety’. Fundamental analysis is an attempt to study everything that can affect the security's value. It includes macroeconomic factors affecting the overall economy and industry such as inflation and intertest rates, and individual specific factors effecting the financial condition and management of companies.

Warren Buffet has identified four filters to succesful value investing:
· Invest in businesses that you understand
· Invest in companies that have favourable long term prospects
· Invest in conpanies with able and trusted management
· Invest in stocks that carry a reasonable price tag

The current market turmoil offers a great opportunity to identify 'Value stocks' and hold them for a reasonably longer period to see your investments grow. Buy on market declines to improve your 'Margin of Safety'.