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Value Investing

Before starting value investing, let us first know something about value. It is very important to know what exactly we mean by “value”. The meaning of “value” was perceived as the value of companies total assets. This meaning came up way back in 1930 by Ben Graham, popularly known as the founder of the value investing . Back in 30s and 40s, one could find out the stocks trading at values which were lower than the actual valuation.

Ben Graham found the stocks worth buying by applying a formula. When the product of total number of shares with the share price works out to be less than the total value of all the assets of the company, the stock happens to be worth buying.

In this theory, it means that if anyone buys all the shares of the company and suspends the business, he would be left with profit. However, the simple formula of value investing is not widely accepted now. It would not be true to say that buying a stock by applying the above mentioned formula is a wrong idea, but the fact is that such opportunities in the market are not much available. In his times, Ben Graham could easily find stocks trading at 40 cents on a dollar. In Columbia University, Ben Graham taught his investing approach. Whatever the students learnt in Ben Graham's class was worth as they could use his approach. Warren Buffett is one of the brilliant students of Ben Graham.

Work done by Ben Graham continued to increase by his student Warren Buffett. Meticulously, he was able to understand the importance of intrinsic worth of the business. The importance of the business is not just the collection of the assets; rather it is more dependent on the potential and ability of the future earnings in the business. It also includes value for the brand recognition, eminence of management and loyalty. The future business earnings are dependent on the aspects of the entire gamut of fundamentals of the company or a business. Understanding value investment is a major thing to be considered by people who are interested in having correct investment strategies.

Basic rule for value investing is to understand the “value” of the business and then to make buy decision based on the “Margin of Safety” at the price of the share. This margin of safety is an indication of how much is the gap between the actual value of the share and the current cost per share.

When margin of safety is high, the risk factor is on a lower side. With such a basic principle, when there is a longer period taken by the market for correction or if there are any calculation errors, the built in flexibility helps to handle the situations.

You must start with the book value and include the forecasted monetary flow to the value calculations. In case of any major strategic decision coming up, do consider it in your forecast too to arrive at a realistic value. Try to consider the current earnings as well as future growth expectation and quantify those. Additionally, you should also have a consideration for the brand value, intellectual property as well as other factors that make the business unique.

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