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Value investing is a long-term investment strategy that focuses on finding undervalued stocks with strong fundamentals. The idea is to buy low, hold patiently, and benefit from price corrections as the market eventually recognises the stock's true worth.
Value investing is an approach where investors look for stocks that are trading below their intrinsic value. These stocks are often overlooked or undervalued due to short-term market fluctuations, economic uncertainty, or temporary issues in the company or sector.
This strategy was made popular by Benjamin Graham and later adopted by renowned investors like Warren Buffett, who emphasise buying fundamentally strong companies at a discount.
Value investing works on the principle of identifying stocks that are mispriced by the market. These stocks are bought at a discount and held for the long term until the price reflects their true value.
Key elements:
Analysing a company’s financial health, management quality, and competitive advantages
Studying historical earnings, debt levels, and future potential
Calculating the intrinsic value using valuation methods like discounted cash flow (DCF)
Understanding the distinctions between value and growth investing can help you align your strategy with your risk tolerance and financial goals.
Feature |
Value Investing |
Growth Investing |
|---|---|---|
Objective |
Buy undervalued stocks |
Buy stocks with high growth potential |
Risk Appetite |
Typically moderate |
Typically higher |
Return Expectation |
Steady over long term |
Higher, but with more volatility |
Investment Horizon |
Long-term |
Medium to long-term |
Popular Metrics Used |
P/E, P/B, Dividend Yield |
Revenue growth, EPS growth |
Intrinsic value refers to the actual worth of a company based on its fundamentals — not its current market price. Value investors use financial models to estimate this value and buy when the market price is significantly below it. This margin of safety helps reduce downside risk.
Value investing appeals to those who prioritise stability and long-term potential, especially in uncertain or declining markets.
Long-term capital appreciation
Margin of safety reduces investment risk
Focus on strong fundamentals
Typically involves less frequent trading, reducing transaction costs
Historically shown to outperform in market downturns
Despite its strengths, value investing may not suit short-term goals or fast-paced market environments.
Requires patience — gains may take time to materialise
Demands thorough financial analysis
May underperform in bull markets
Subject to behavioral biases (e.g., ignoring turnaround signals)
Not ideal for short-term traders or speculators
Here are some widely used strategies in value investing:
Buy and hold undervalued stocks with strong balance sheets and low P/E ratios.
Focus on companies with a history of dividend payouts and strong cash flow.
Look for temporary setbacks in fundamentally strong companies.
Use valuation ratios like Price-to-Earnings (P/E), Price-to-Book (P/B), and Dividend Yield.
Stay diversified to mitigate sector or company-specific risks.
Value investing is a disciplined, long-term approach focused on buying fundamentally strong stocks at discounted prices. While it requires patience and analysis, it offers stability and potential upside for investors with a long-term outlook.
This content is for informational purposes only and the same should not be construed as investment advice. Bajaj Finserv Direct Limited shall not be liable or responsible for any investment decision that you may take based on this content.
Value investing was popularised by Benjamin Graham, often regarded as the father of value investing, through his influential book, ‘The Intelligent Investor’. Warren Buffett, his most famous student, further advanced the philosophy and became its most well-known advocate.
Common valuation ratios used in value investing include Price-to-Earnings (P/E), Price-to-Book (P/B), Dividend Yield, and Debt-to-Equity (D/E). These help assess whether a stock is undervalued relative to its earnings, assets, returns, or debt levels.
While value investing cannot fully protect against market crashes, it often provides a cushion through the margin of safety principle. By focusing on fundamentally strong, undervalued stocks, investors may experience lower volatility during downturns.
Value investing is generally a long-term approach, with investors holding stocks for several years. The goal is to wait patiently for the market to recognise a company's true value, which can take time depending on its growth and recovery.
Value stocks are considered less risky when chosen wisely, especially those with strong fundamentals and attractive valuations. However, they still carry risks, such as poor management, industry decline, or errors in estimating intrinsic value.
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