What Is A Value Investor?

I am a value investor. Ironically, the phase is used by so many, including myself, that it seems the term “value investor” has very little value left. So what exactly is value investing and why does it matter?

Going back to the original definition coined by Benjamin Graham and David Dodd in their book “Security Analysis”, there are three main ideas that a value investor tend to believe in.

1)      The market is erratic. We view the market as an emotional and strange partner called Mr. Market. He would show up everyday hoping to buy our shares or sell us his shares. However, the price he sets is wildly affected by his mood and the current bias that he possesses at the time. Our job is to not get affected by his crazy temperament and be prepared to take advantage of him when he made unrealistic offers.

2)      Although the market price of a company is varying constantly due to Mr. Market, the underlying fundamental value of the company is relatively stable. This fundamental value of the company is also known as the intrinsic value of the company. Our job as a value investor is to estimate the intrinsic value of the company. For example, DBS Group Holdings Ltd (SGX: D05) went from above S$20.00 per share in 2008 to less than S$7.00 per share in 2009 and back to around S$15.00 per share in 2010 in less than 2 years. However, across the same period, it is hardly possible for the intrinsic value of DBS Group to vary by more than 60% but yet its market price fluctuated during the same period.

3)      As value investors, our goal is to buy shares of companies when its market value is significantly below its estimated intrinsic value. In essence, we would try to buy a dollar asset for less than that.

Foolish Summary

My fellow contributor, Hui Leong Chin has discussed before of how different value investors come to different strategies of buying asset cheaply. The strategy itself might varies among investors, but all value investors believes in the three main ideas discussed above. And that might be the defining factors of what a value investor truly is.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Stanley Lim does not own any companies mentioned.