For a long term investor, the market has some space which is overlooked or avoided by the crowd at a large that turned out to be a great investment opportunity. Although in a runaway rally there could be some sort of short corrections, the returns generated over long term pays well. Even the most successful investors believe in the power of value investing. It is a successfully proven investment strategy that offers an opportunity to buy good stocks at a discounted price.

• What is Value Investing?

Value investing is an investment approach which involves picking up stocks that appeared to be trading below their intrinsic or true value. In simple words, the investor picks the undervalued stock having the potential to outperform in future. The intrinsic value of a stock is a combined value of the company’s financial performance, revenue, cash flow, earnings, profits and including the company’s brand value, business model and competitive advantage.

Value investors have a thorough understanding of the market and know the concept of undervalued and overvalued stock well that separates them from the rest of the herd. They carry the belief that the share prices will not justify the long term fundamentals of the company because the prices are driven by market sentiments. Thus, in the long term shares prices will follow its intrinsic value no matter whether it is currently trading below or above its intrinsic value.

• How Value Investing Works?

The concept behind value investing is simple, just research the stocks which have the potential to outperform in future, track and purchase them when they are undervalued or on sale. There could be short term pain but holding your positions patiently keeping in mind the true value of the company would compensate well. When your position reaches the intrinsic or true value of the company, or maybe rise more, hold and book your profits.

Warren Buffet the well-known value investor the world of finance has seen yet has said, “Investing is simple, but not easy”. Though it seems simple to buy undervalued stocks and hold it until it reaches its intrinsic value. But, how would one find the stock which is undervalued that can be done only by an in-depth study of the financials of the company and other factors associated with it.

• How Does Value Investors Derive Intrinsic Value?

Value investors on determining the intrinsic value of the company look at multiple fields to be as precise as possible including the company’s financial history, revenues, cash flows, business model and future profitability. They also investigate and emphasize why the stocks of the company are undervalued and whether it has organisational and financial capabilities to recover from such undervaluation or not.

No doubt, value investing is profitable. But, the investor should know that after finding the true value of the company and buying the shares of it at a discounted price, there are some chances of error. These errors can be avoided by following the Margin of Safety principle which is key to successful investing. The Margin of Safety is based on the risk tolerance of investors that helps them to lose less money if the company’s shares don’t perform as they were expected.