======Value Investing======
Value Investing is an investment strategy that involves buying securities—typically stocks—for less than their calculated underlying worth. First articulated by professors [[Benjamin Graham]] and [[David Dodd]] at Columbia Business School in the 1920s and 1930s, this approach treats a stock not as a ticker symbol to be traded, but as an ownership stake in a real business. The goal is to determine the business's //real// value, or [[Intrinsic Value]], and then purchase its stock at a significant discount to that value. This discount is known as the [[Margin of Safety]], which serves as a cushion against errors in judgment or unforeseen market declines. Rather than chasing hot trends or trying to predict short-term market movements, the value investor acts like a business analyst, patiently seeking out high-quality companies that the market has temporarily, and irrationally, undervalued. It is the philosophical opposite of speculation and stands in contrast to other strategies like [[Growth Investing]], which often prioritizes a company's future earnings potential over its current valuation.
===== The Core Philosophy: Price vs. Value =====
The bedrock of value investing is a simple but powerful idea: **Price is what you pay; value is what you get.** The stock market is often a whirlwind of emotion, with prices swinging wildly based on news, sentiment, and herd behavior. A value investor cuts through this noise by focusing on the business itself.
Imagine you were buying a local coffee shop. You wouldn't just pay whatever the seller was asking. You'd investigate its sales, profits, debts, and location to determine what the business is truly worth. Value investing applies this exact same logic to publicly traded companies. The daily stock price is just an offer on the table; it is not necessarily a reflection of the company's long-term value.
To make this concept unforgettable, Benjamin Graham introduced an allegorical character in his masterpiece, [[The Intelligent Investor]]: [[Mr. Market]].
==== Meet Mr. Market: Your Manic-Depressive Business Partner ====
Graham asks you to imagine that you are partners in a private business with a fellow named Mr. Market. Every day, without fail, he shows up and offers to either buy your share of the business or sell you his, at a specific price.
  * On some days, Mr. Market is euphoric. He sees nothing but a rosy future and offers you a ridiculously high price for your stake.
  * On other days, he is utterly despondent. Overwhelmed by bad news and fear, he is desperate to sell and offers you his share at a rock-bottom, bargain price.
The beauty of this setup is that you are under **no obligation** to trade with him. You can happily ignore his silly high offers and patiently wait. When his mood swings to despair, you have the opportunity to buy from him at a wonderful discount. The value investor uses Mr. Market's emotional rollercoaster to their advantage, rather than getting swept up in it.
===== The Three Pillars of Value Investing =====
The entire framework rests on three interconnected concepts that guide every decision.
==== Pillar 1: Intrinsic Value - What's It //Really// Worth? ====
Intrinsic Value is the estimated "true" worth of an asset, based on its ability to generate cash over its lifetime. It's an educated guess, not a hard number you'll find on a screen. Investors calculate it by analyzing a company’s financial statements, its business model, and its future prospects. While methods like [[Discounted Cash Flow (DCF)]] analysis can be used to put a number on it, the key is the mindset: you are trying to understand the business's underlying economic reality, separate from its fluctuating stock price.
==== Pillar 2: Margin of Safety - Your Financial Seatbelt ====
Popularized by [[Warren Buffett]], a student of Graham's, the Margin of Safety is the most critical principle for preserving capital. It is the difference between the Intrinsic Value of a stock and the price you pay for it. If you estimate a company is worth €100 per share, buying it at €60 gives you a €40 Margin of Safety. This buffer protects you from:
  * **Errors:** Your valuation might be wrong.
  * **Bad Luck:** The industry might face an unexpected crisis.
  * **Volatility:** The market might push the price down even further before it recovers.
As Buffett famously says: "Rule No. 1: Never lose money. Rule No. 2: Never forget Rule No. 1." The Margin of Safety is how you follow those rules.
==== Pillar 3: Circle of Competence - Stick to What You Know ====
While not always listed as a formal pillar, the idea of a [[Circle of Competence]] is vital. This means you should only invest in businesses that you can genuinely understand. You don't need to be an expert in every industry. If you understand banking but not biotechnology, stick to analyzing banks. Investing outside your circle of competence turns disciplined investing into pure gambling.
===== Is Value Investing Still Relevant? =====
In an age of fast-moving technology stocks and algorithm-driven trading, some argue that value investing is outdated. They often point to the [[Efficient Market Hypothesis (EMH)]], a theory suggesting that stock prices always reflect all available information, making bargains impossible to find.
However, value investors believe markets are //mostly// efficient, but not //perfectly// efficient. Human emotions like fear and greed create periodic opportunities where Mr. Market gets things wrong. The principles of value investing are timeless—the idea of buying something for less than it's worth will never go out of style. What changes are the sources of value. Decades ago, value was in factories and inventory. Today, it might be found in intangible assets like brand power, network effects, or intellectual property, requiring investors to adapt their analytical methods.
===== Putting It Into Practice =====
Becoming a value investor is a journey of shifting your mindset from that of a speculator to that of a business owner.
  - **Think Like a Business Owner:** When you buy a stock, you are buying a piece of a business. Ask yourself: "Would I be happy to own this entire company at this price?"
  - **Do Your Homework:** This means reading a company’s [[Annual Report]]s (especially the 10-K in the US), understanding its competitive advantages (its [[Economic Moat]]), and assessing the quality and integrity of its management.
  - **Be Patient:** Value investing is a marathon, not a sprint. You must have the discipline to wait for the right pitch. As Warren Buffett notes, "The stock market is a device for transferring money from the impatient to the patient."