The following clip is basically a summary on the concept of value investing:
Basically, the focus of value investing is to figure out how much you would pay for a company if you were to buy it. A company’s market value and intrinsic value should be the same, in theory. However, this is almost never the case. The market value is almost always either above or below the intrinsic value of the company. If the market value of all the stocks is less than the estimated value of the company, then you’ve got an undervalued company. On the other hand, if you were to find a company with a market value above the company’s worth, then the company is overvalued.
Notice how Warren Buffett reads the annual report first before looking at the market value. He does this to avoid his knowledge of the market value from influencing his valuation. If he knew what the market value was before he analyzed the company’s value, he would be biased towards valuing the company higher than the market value for the sake of finding an undervalued stock. However, since Buffett is aware of this bias, he values the company before he looks at the market value.
Value investing is the most reliable investing strategy. If done right, 99% of the time it will never fail. Just look at Warren Buffett, who is the world’s greatest value investor. He has made only a handful of mistakes throughout his fifty plus years of his investing career; even those handful of mistakes he’s made weren’t a significant loss for him. If the investor is willing to put a lot of time and energy into their investments, then they will likely find undervalued stocks that will yield a high return.
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