VALUE INVESTING
Overview
Buying stocks that trade below their estimated intrinsic value, based on thorough fundamental analysis. Made famous by Benjamin Graham and Warren Buffett. Requires patience — the market can be wrong for a long time.
Setup
- 1.Screen for low P/E, P/B, P/FCF ratios relative to sector peers.
- 2.Analyze balance sheet for strong cash position and manageable debt.
- 3.Estimate intrinsic value using DCF (Discounted Cash Flow) analysis.
- 4.Buy when price is at a significant 'margin of safety' below intrinsic value.
- 5.Set a price target and hold until value is recognized or thesis breaks.
Max profit
The gap between purchase price and true intrinsic value, plus growth during the holding period.
Max loss
Full investment — value traps (stocks cheap for good reason) do occur. Stop fundamental deterioration signals exit.
Breakeven
Purchase price.
When to use
When a high-quality company has been unfairly punished by the market due to temporary problems, sector rotation, or general bear market.
When to avoid
In highly speculative or rapidly changing industries where traditional valuation metrics don't apply. Not suitable for short time horizons.