What is Value Investing? - dummies

By David Stevenson

Many UK investors instinctively find themselves balking at excited talk of growth stocks and tenbaggers. Deep down they sense that they’re being sucked – or even suckered – into an economic bubble. More to the point, they think that a better way of building an investment strategy exists, one not anchored on projections of where volatile earnings may be headed in the future.

Most of the time value strategies probably deliver you better returns than growth strategies, if only because they tend to focus on picking companies that pay out a nice, boring dividend every year! You probably aren’t going to make large absolute losses from value investing, but you may lose out, in relative terms, in a bull market phase. You still make money, of course, but growth strategies might have delivered huge returns.

Using value as the key criterion

Value investors believe that the stampede towards growth companies is almost inevitably a recipe for disaster, and instead they advise investors to look at the underlying value of the company. Value investors start from a very different, contrarian place when compared to growth investors.

They look for a company whose shares are great value; that is, cheap relative to their prospects. They instinctively hate paying-the-odds for anything and think that most people are probably wrong most of the time.

Origins of value investing

The value school of professional investing started in one of the greatest boom and busts of history: the Wall Street Crash of 1929. At that time Ben Graham was working on Wall Street as a stockbroker. He noticed the mania for growth and was horrified. For him, the crowd was a dangerous beast and certainly not one to be trusted because it piles into whatever is hot.

Graham believed that the market gets things wrong because of its obsession with growth at all costs.