Value investing

Value investors buy beaten-down companies whose shares appear cheap when compared to current earnings or corporate assets. Value investors typically buy stocks with high dividend yields, or ones that trade at a low price-to-earnings ratio (P/E) or low price-to-book ratio (P/B). Some famous value investors are Warren Buffett, John Templeton, John Neff, and Michael Price.

Value investing as a school of investment principle was established by Benjamin Graham, who taught many famous investors during his tenure in Columbia University. In his book Intelligent Investor (last revised in 1970s), he advocates the important concept of margin of safety , which calls for a cautionary approach to investing. In term of picking stocks, he recommends defensive investment in stocks trading not far from its tangible book value as a safeguard to adverse future development often encountered in stock market.

However, the concept of value (as well as book value) has evolved significantly since the 1970s. Book value is meaningful only in some traditional stable industries where the value of asset is well defined. When an industry is going through fast technology advancement, the value of asset is not easily estimated. Sometimes, the production power of an asset can be significantly reduced due to competitive disruptive innovation and therefore its value can suffer permanent impairment. One good example of decreasing asset value is a personal computer. Book value also does not mean too much in the service and retail sectors.

One modern model of calculating value is the discounted cash flow model (DCF). The value of an asset is the sum of its future cash flows, discounted back to the present.