Have you heard about "Value Investing"?

A strategy of buying stocks that are:

1)Trading at prices lesser than their intrinsic values.

2)Stocks that have been undervalued by the market.

Rationale - Market often overreacts to different news stories, leading to price movements that don’t reflect the actual long-term fundamentals of the concerned companies, thus providing an investment opportunity.

Benefit - Value investors can purchase stocks at lower prices than normal.

Requirement - Value investing requires a contrarian approach, apart from a long investment horizon. If we look back at the statistics of the past hundred years, we’ll notice that value investment strategy has outperformed various index returns across many equity markets.

Though, not easy

A major task related to value investing is correctly estimating the intrinsic values of different stocks. Please note, there is no specific correct intrinsic value when it comes to stocks. Two investors may place completely different values on a given company even if they’re provided the exactly same information. This is where the concept of ‘margin of safety’ comes into the picture. It implies that you purchase stocks at a discount big enough to give you some room for error in the value estimation.

Why stocks may trade at discounted rates

Stocks may trade at discounted rates owing to several different factors. Nevertheless, the most commonly known reason is the short-term profit-related disappointment among investors. Many a times, such disappointments can also result in strong emotional reactions from the shareholders who may resultantly, sell all their holdings, fearing further negative results.

Value investors on the other hand recognize and place importance on two important facts.

Value investing is an art that and we at Artofwealthcreation exploit the irrational behaviour patterns of emotional investors. Emotion is always a constant feature when it comes to market investments. Even though the companies on offer may change from one decade to the other, the basic human nature of investors doesn’t. Fear and greed still have a very strong hold on everyone, just like they did a hundred years ago.