Value Investing
In short
Buying undervalued companies trading below intrinsic value — margin of safety focus
Value investors hunt for companies the market has mispriced — cheap relative to their true worth. Like finding a $100 bill selling for $70. The strategy requires patience: sometimes the market stays wrong for years.
Value investing, pioneered by Graham and Buffett, seeks companies trading below intrinsic value (based on DCF, comparables, or asset values). Value has historically outperformed growth over long periods but experienced a decade-long underperformance in 2010-2020.
Related concepts
- Growth Investing — Growth investors buy companies growing fast — even if the stock seems expensive today. The bet is that rapid revenue and earnings growth will justify the high price. Think early Amazon or Tesla. High risk, potentially high reward.
- Intrinsic Value — The market price is what people are willing to pay right now. Intrinsic value is an estimate of what the stock is actually worth based on the company's cash flows and assets. If a $40 stock has an estimated intrinsic value of $55, the gap ($15) is what practitioners call the margin of safety.
- Margin of Safety — If you think a stock is worth $100, don't pay $100 — pay $70. That 30% discount is your margin of safety. If your estimate is wrong, you still might not lose money.
- P/E Ratio — Imagine buying a lemonade stand that makes $100/year. If it costs $2,000, the P/E is 20 — you need 20 years of earnings to pay it off. Lower means cheaper.