Value investing: Concepts, strategies, and intrinsic value calculation

Invest when the price is low and sell when the price rises by learning the value investing strategy.

What is value investing

Value investing is one of the most popular investing styles adopted by many investors who want the value of their investment to grow over time. It was coined by Benjamin Graham in his book The Intelligent Investor. The concept of value investing became popular after this book was released. To date, these concepts are widely used by investors. 

What is value investing?

Value investing is a style or method of investing in shares whose market price is lower than their intrinsic value. If the intrinsic value of the share/company is lower than the market value, the stock is undervalued and will eventually go up in the future. So, finding stocks or companies that are presently undervalued is the primary focus of value investing. 

Once you identify these companies, you can invest in the stocks and wait for the price to get close or equal to the intrinsic value. But how can you identify such stocks? To do this, you have to check and analyse four things about the company: 

Also Read: 8 Investment Strategies From Warren Buffet For Beginners

First of all, you need to calculate the intrinsic value of the company. There are three ways of determining the intrinsic value. 

Discounted cash flow method: As per this method, you have to first estimate the future cash flow of the company. Then calculate the present value of each future cash flow by discounting them and summing them up to arrive at the intrinsic value. 

Using financial ratios: You can derive the intrinsic value of a company by multiplying its earnings per share (EPS) by its P/E ratio and (1+r). 

Intrinsic value = EPS x (1+r) X P/E ratio

Where r = expected earnings growth rate

For instance, let’s assume the EPS of Company ABC is Rs 33, the stock’s present P/E ratio is 25, and the growth rate of expected earnings is 10%. 

Then, intrinsic value of Company ABC = Rs 33 x (1+0.10) x 25 = Rs 907.5

Asset-based valuation: One of the simplest ways to calculate the intrinsic value is through asset-based valuation.

Intrinsic value = Total assets of the company (both tangible and intangible) – Total liabilities of the company

Also Read: Should You And Your Partner Have Different Investment Strategies?

Next, you need to analyse how the management is operating. Whether the management of the company is prudent or not; how the management takes a decision and whether the decisions are producing positive results for the company or not. 

Thirdly, the prospects of the company have to be analysed.

Finally, you need to consider the overall economic scenario. 

Strategies for value investing

  • Selective trading strategy: This strategy is for finding stocks that will probably beat the market returns in the near future due to government policy changes, investments received, or other similar factors.
  • Buying cheap and selling dear: This is about finding stocks that are really cheap at present but where the company has the potential to grow enormously. 
  • Long-pull selection strategy: This strategy is for people who can stay invested for a long duration. They can shortlist companies in their nascent stages that have huge growth potential.

Also Read: How A Passive Investing Strategy Involving Equity, Debt, And Gold Can Create Long-Term Wealth?

Last words

Though the concept of value investing was coined decades ago by Benjamin Graham, it is still very much relevant. Today’s investors may have modified the strategies a bit, but for long-term investment, value investing is one of the best strategies.

Value investing is one of the most popular investing styles adopted by many investors who want the value of their investment to grow over time. It was coined by Benjamin Graham in his book The Intelligent Investor. The concept of value investing became popular after this book was released. To date, these concepts are widely used by investors. 

What is value investing?

Value investing is a style or method of investing in shares whose market price is lower than their intrinsic value. If the intrinsic value of the share/company is lower than the market value, the stock is undervalued and will eventually go up in the future. So, finding stocks or companies that are presently undervalued is the primary focus of value investing. 

Once you identify these companies, you can invest in the stocks and wait for the price to get close or equal to the intrinsic value. But how can you identify such stocks? To do this, you have to check and analyse four things about the company: 

Also Read: 8 Investment Strategies From Warren Buffet For Beginners

First of all, you need to calculate the intrinsic value of the company. There are three ways of determining the intrinsic value. 

Discounted cash flow method: As per this method, you have to first estimate the future cash flow of the company. Then calculate the present value of each future cash flow by discounting them and summing them up to arrive at the intrinsic value. 

Using financial ratios: You can derive the intrinsic value of a company by multiplying its earnings per share (EPS) by its P/E ratio and (1+r). 

Intrinsic value = EPS x (1+r) X P/E ratio

Where r = expected earnings growth rate

For instance, let’s assume the EPS of Company ABC is Rs 33, the stock’s present P/E ratio is 25, and the growth rate of expected earnings is 10%. 

Then, intrinsic value of Company ABC = Rs 33 x (1+0.10) x 25 = Rs 907.5

Asset-based valuation: One of the simplest ways to calculate the intrinsic value is through asset-based valuation.

Intrinsic value = Total assets of the company (both tangible and intangible) – Total liabilities of the company

Also Read: Should You And Your Partner Have Different Investment Strategies?

Next, you need to analyse how the management is operating. Whether the management of the company is prudent or not; how the management takes a decision and whether the decisions are producing positive results for the company or not. 

Thirdly, the prospects of the company have to be analysed.

Finally, you need to consider the overall economic scenario. 

Strategies for value investing

  • Selective trading strategy: This strategy is for finding stocks that will probably beat the market returns in the near future due to government policy changes, investments received, or other similar factors.
  • Buying cheap and selling dear: This is about finding stocks that are really cheap at present but where the company has the potential to grow enormously. 
  • Long-pull selection strategy: This strategy is for people who can stay invested for a long duration. They can shortlist companies in their nascent stages that have huge growth potential.

Also Read: How A Passive Investing Strategy Involving Equity, Debt, And Gold Can Create Long-Term Wealth?

Last words

Though the concept of value investing was coined decades ago by Benjamin Graham, it is still very much relevant. Today’s investors may have modified the strategies a bit, but for long-term investment, value investing is one of the best strategies.

Expert Article block example

NEWSLETTER

Related Article

Premium Articles