An Introduction to Value Investing
Benjamin Graham – widely recognized as the father of value investing – believed that, in the short term, the markets were a voting machine, with a security’s price reflecting its popularity on any given day. In the long term, however, Graham believed the market was more of a weighing machine, aligning a security’s price with its intrinsic value, or the true worth of the issuing company.
For value investors, this means that a security’s price and its intrinsic value often detach from one another in the short term. Because of the manic-depressive nature of the overall market – where sentiment can shift between sweeping, carefree optimism and overwhelming fear and uncertainty seemingly overnight – security prices tend to fluctuate much more than the true worth of the companies they represent.
This irrationality can materialize on the upside, helping to lift prices to dangerously lofty heights. It can also appear on the downside, helping to drag prices to bargain levels.
Value investors target the latter situation, seeking to purchase out-of-favor securities that are trading at discounts to their intrinsic values, and then holding them until the market recognizes their true worth.
By confidently approaching the short-term vagaries of the market with rational, objective analysis, we aim to identify compelling investment opportunities and deliver competitive long-term results. As Graham put it, the market “... often goes far wrong, and sometimes an alert and courageous investor can take advantage of its patent errors.”