Value investing

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3. Does value investing suit you?

In general, value investing is regarded as a methodology for the analytical, the patient and the prudent.

Analytical

Value investing is a 'bottom-up' approach. The investor ignores market sentiment, short-term swings, and other extraneous factors affecting a share price, and instead concentrates on the fundamentals of the business and its intrinsic value. He analyses the balance sheet and profit and loss account of a company, produces a valuation for the company, and compares it with the share price.

Patient

Investors who want to make money in a hurry will not be comfortable with the value investing approach. The number of companies that fulfil a value investor's 'buy' criteria will often be small, and after the value investor has bought, it may take months or even years for the market to realise that it has undervalued the company and for the value investor to make his profit.

Prudent

Value investing is regarded as 'prudent'. At its core is the concept of 'margin of safety'. Value investors seek a cushion between what they think a company is worth, and what they are prepared to pay for it, so that even in the worst case scenario their money has some protection.

An overview of value analysis

1. What is value investing? 2. Ben Graham 3. Does value investing suit you? 4. Back in fashion 5. Undervalued assets - introduction 6. Undervalued assets - property companies 7. Debt 8. Earnings 9. Earnings - an example 10. Dividends 11. Ratio of market capitalisation to sales 12. Warren Buffett's principles 13. Why do stocks become undervalued/overvalued? 14. Conclusion

• Value Growth Investing