'Value Investing' – an explanation

Value investing is an investment paradigm that derives from the ideas on investment that Ben Graham and David Dodd began teaching at Columbia Business School in 1928 and successively developed in their 1934 text Security Analysis. Though value investing has taken many forms since its beginning, it commonly involves buying securities that appear underpriced by some form of fundamental analysis. For example, such securities may be stock in public companies that trade at discounts to book value or tangible book value, have high dividend yields, have low price-to-earning multiples or have low price-to-book ratios.

High-profile proponents of value investing, including Berkshire Hathaway chairman Warren Buffett, have argued that the essence of value investing is buying stocks at less than their intrinsic value. "Margin of safety" - Benjamin Graham calls it as the discount of the market price to the intrinsic value. The intrinsic value is the discounted value of all future distributions. However, the future distributions and the appropriate discount rate can only be assumptions. Graham recommended using only past one and never using future numbers.

For the last 25 years, rather than generic companies at a bargain price, Warren Buffett has taken the value investing concept even further with a focus on "finding an outstanding company at a sensible price"

"Value investing” was never used by Graham as a phrase, — the term was coined later to help describe his ideas and has resulted in significant misinterpretation of his principles, the foremost being that Graham simply recommended cheap stocks.