There are different types of investors. For instance, traders, speculators, growth investors, index trackers, stock pickers and the value investors. Almost every investor knows about Ben Graham, who coined the term value investor. Some people consider value investors as older people, contrarians, not more money makers, only interested in boring industries. However, all these myths are false.
Although value investors did not make much money in the last few years, but over the long term, they are doing very well. Such investors are often older people simply because this approach requires patience, which we acquire with age. Moreover, sometimes these investors are interested in boring looking industries, just because that is where the value is.
These investors are often contrarian as they are looking for value that the market overlooked. However, they are contrarian because they have found the value, and not because they think that the market is always wrong. A major factor, which defines such investors is the search for value.
The value investing is about paying the right price. Those who pay the too high price for the best companies in the world, they will be lucky to make money out of it. Moreover, acquiring good companies for half what they are really worth, and they have given themselves a massive advantage for the long term.
The right price can be a bone of contention in an investment, so it is very important to calculate it. Some value investors say that the right price is a 25% discount to the market, some put a number on it and look at the historical average PERs, some of them use NPVs.
Value investors are considered fundamentalists because they invest in companies on the basis of business, and they tend to look at the long-term earning trends, also long term trends in ROCE. Return on capital employed is a key figure for such investors as they look for companies that generate better returns as compared to others, at a lower price compared to paying for other assets.
It is disciplined, very rational and very logical investing approach. Value investors usually invest for the long term and can be very patient with their stocks when they have a feeling that the market has undervalued it. They can wait years and years unless the value is finally recognized either by a trade bidder or by the market.
However, you should not confuse value investing with the buy and hold investment strategy because buy and hold are a prejudice and not a rational style of investment. Time is not important for value investors because they care about the value.
All in all, the above mentioned is a guide to value investing. There are a number of investment strategies and investment frameworks, and every investment strategy has some advantages as well as disadvantages. If you are a beginner investor, you are highly advised to do fundamental as well as technical analysis of those companies you are willing to invest in. It will certainly help you to make a better decision.