What is value investing?
Value investing means buying shares of a business for less than you think the business is really worth, then holding them patiently. It was developed by Benjamin Graham in the 1930s and made famous by his student Warren Buffett.
Price versus value
A stock's price is what the market charges today. Its value is what the business is worth, based on the cash it can earn over many years. Value investors believe the two can drift apart for a while, and they try to buy when the price is well below the value.
Where it comes from
Benjamin Graham laid out the approach in Security Analysis (1934, with David Dodd) and The Intelligent Investor (1949). He described the market as a moody partner, Mr. Market, who offers prices that are sometimes too high and sometimes too low. You can ignore him or take his offer.
How it has changed
Graham often bought very cheap stocks of ordinary companies. Buffett, with his partner Charlie Munger, shifted toward buying excellent businesses at fair prices and holding them for decades. Both styles are called value investing today.
The hard parts
Estimating what a business is worth involves guesswork, and a cheap stock can stay cheap or get cheaper. Value investing needs patience, because it can trail the wider market for years at a time.
Frequently asked questions
Is value investing the same as buying cheap stocks?
Not quite. A stock can look cheap because the business is shrinking. Value investors look for a gap between the price and what the business is likely worth.
Which famous investors use value investing?
Warren Buffett, Seth Klarman, Mohnish Pabrai, and many other managers tracked on Stockslash describe themselves as value investors.
How long do value investors hold a stock?
Often for years. The idea is to wait until the market price moves closer to the business's value, which can take a long time.