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What is value investing?

I keep hearing that value investing is the way to go this year but I am not sure what that means.

Value investing is an investment strategy made famous by the likes of Benjamin Graham and later Warren Buffett. Value investing generally involves buying shares that look underpriced.

Experts in the craft use what is called fundamental analysis and that includes everything from mathematical analysis of the books of a company to actually going out to the business and quizzing the CEO. Lots of value investors have different approaches but they tend to look at measures that give them a good feeling about the business. They like companies that trade with share prices that suggest they are trading at a discount to book value.

They could have high dividend yields and low price-to-earning multiples or have low price-to-book ratios. These could be signs that they are a value investment. Buffett uses the idea that you look at the share market price to get the market value of the company and then you work out the intrinsic value of the company. If the share price is less than the intrinsic value, that company is a buy.

The intrinsic value, in case you are wondering, is the discounted value of all future distributions but the tricky bit is that future distributions and the appropriate discount rate can only be assumptions.

It takes some time to master the knowledge to become an independent value investor but there are fund managers who call themselves value investors and these are currently in favour with many market commentators.

Against this, there are fund managers who are growth investors who ride companies that are well placed to grow with the growth of the market. They are sometimes called top-down investors as they find companies that, say, do well when the economy is growing fast, such as retailers, and they buy them ahead of the growth and simply ride them to the top.

This investing can be challenging when new threats come along, like we see now, where conventional retailers are being beaten up by the threat of the new online world of retailing. Of course, fund managers carry a big number of companies to ensure that one bad performer doesn’t undermine their tapping into the growth cycle.

For advice you can trust book a complimentary first appointment with Switzer Financial Services today.

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

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Published on: Friday, March 04, 2011

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