means taking advantage of short-term fluctuations in
share prices to invest in the long term.
It is based on acquiring stocks below what Benjamin Graham (the father of value
investing) defined as the Intrinsic Value
: this is the value an informed
buyer will offer for 100% of a company in a peer-to-peer negotiation.
, a disciple of Graham’s and possibly the best investor
ever, has always applied Value Investing criteria to his investments, seeking
out comprehensible businesses with favourable long-term prospects, managed by
honest, competent people and, most importantly, which are available at an
attractive price. An attractive share price is one that is at a discount to its
Intrinsic Value. The difference between both is what Graham called the Margin of
CHARACTERISTICS OF VALUE
Although it is impossible to demonstrate whether a market is efficient, i.e. if
all the information is priced into the share price, we are able to see that
there is a group of investors (Value
) which has systematically achieved better results than the
market. They all have the same characteristics:
Always invest in the long
apply value investing.
They pay scant attention
to macroeconomic analysis
They do not find technical
They don’t often use derivatives
BASIC CONCEPTS FOR A
Do not confuse value and price.
1) In the long term
: PRICE = VALUE
In the long term a share or bond’s price will tend to equal its value,
reflecting its “economic” prospects.
2) In the short term
: PRICE | VALUE
In the short term, “circumstantial” factors affect an asset’s price without
changing its intrinsic ability to generate value.
: Take advantage of short-term distortions to invest in the
long term, maintaining a margin of safety.
: Determining an asset’s value.
BASIC CONCEPTS OF
The market may be efficient, but not always.
It efficiently reflects the
, but does not tend to reflect possible future changes
(e.g. in shareholder structure, management, cycles, margins).
: Fear of moving away from the consensus.
It exaggerates movements
: We often follow trends, which become self reinforcing.
It penalises excess
: The large brokers or opinion makers do not profit from their
research of small stocks.
CONCLUSION: Maximise inefficiency (you don’t always have to invest).