An introduction to value investing
Benjamin Graham is widely recognised as the father of value investing. He believed that, in the short term, capital markets are like voting machines, with a security’s price reflecting its popularity among investors on any given day. In the long term, however, the market is more of a weighing machine, aligning a security’s price with the true worth of the underlying business.
For value investors this means that a business’s share price and its true worth are not aligned with one another in the short term. When it comes to investing, it is human nature to allow sentiment to shift between sweeping, carefree optimism and over-whelming fear and uncertainty. This short-term irrationality can result in prices lifting to dangerously lofty heights, or alternatively dragging prices to bargain levels. Value investors target the latter situation, purchasing out-of-favour shares that trade at discounts to the underlying value of the business.
Value investors work in the long term, and emphasise the accumulation of lasting wealth over the pursuit of potentially fleeting short-term gains. We expect to realise significant profits as the market recognises the true worth of the assets our clients own. We also acknowledge that this process often takes time. Patience is, therefore, an essential ingredient in a value investing approach. Typically, we hang on to our investments and will not sell an investment in less than five years.
For a thorough understanding of the principles and process of value investing, we recommend you read Charles Brandes’ Value Investing Today. Benjamin Graham’s The Intelligent Investor is also an essential item in any value investor’s library.