Table of contents:
Investing in companies of value
Value investing is an investment strategy in which investors pursue the goal of determining the intrinsic value (also: fair value) of a share or company and base their investment decisions on this. Buying opportunities arise when the current ratio of market value/stock market value to intrinsic value appears attractive (e.g. when the market value is lower than the intrinsic value).
In order to determine the intrinsic value of a company, various key figures of fundamental analysis are used, such as the PER, the KUV, the KBV, dividend yield, return on capital, free cash flow, liquidity ratio, and others. The goal of value investing is to achieve stable returns (or an excess return over the broad market) by investing in companies with a long-term successful business model.
History of Value Investing
The father of value investing is the American investor Benjamin Graham, whose books Security Analysis and The Intelligent Investor are considered standard works. Graham used key figures from fundamental analysis to determine the intrinsic value of a stock. His strategy was to buy stocks below their intrinsic value.
Graham influenced numerous investors in the 20th century and was the most important influence and mentor for Warren Buffett in particular.
Among the most well-known and important value investors are
- Benjamin Graham
- Warren Buffett
- Charlie Munger
- Peter Lynch
- et al
Over the years, various investors have further developed the classic value investing approach, so that today, in addition to the factors described by Graham, other criteria often play a role in the selection of a value share, such as
- Corporate governance/management
- Competitive advantages
- Insolvency risk
- further subjective assessments
- Value Investing is a conservative equity investment strategy.
- Benjamin Graham, Warren Buffett and Charlie Munger were/are well-known value investors.
- The so-called intrinsic value (fair value) plays an important role.
- ETFs allow broadly diversified investments in value stocks.
Invest in value stocks
Value Shares, Value Indices & Value ETFs
What are value stocks?
Value shares are shares that meet certain requirements according to the selection criteria of value investing. Since there is no generally accepted definition of value stocks, you should create your own set of rules to help you identify value stocks. These can be simple fundamental ratios (e.g. P/E ratio, P/B ratio) or factors based on a subjective assessment (quality of products and services, management’s assessment, future competition, etc.) or a combination of both.
The following four points form a good starting point for the analysis and are based on the rules of Warren Buffett:
- Profitability of the company
- Sales & profit growth
- Liquidity & indebtedness
- Corporate Governance
In order to identify shares that match your personal value criteria you can use a share screener, e.g. those of finviz.com. This allows you to filter the American stock universe according to fundamental and technical selection criteria. Thus, bswp. can use market capitalization, dividend yield, profit and sales growth, the ratio of share price to free cash flow and much more as selection criteria.
In the next step, the selected shares should be examined more closely in order to arrive at an assessment of the company’s management or insolvency risk, etc.
Value Indices & Value ETFs
The popularity of value stocks has led to the creation of many value indices and value ETFs over the years, which replicate the performance of certain stocks that are classified as value stocks. Even if you are looking for individual value stocks, it is worth taking a look at the composition of the indices and ETFs.
Below you will find some different value indices and ETFs:
MSCI World Value Index & ETF
The MSCI World is a popular ETF among many private investors for broadly diversified global investments. For value investors there is also the MSCI World Global Index and the ishares MSCI World Value Factor UCITS ETF, which tracks the performance of the index.
The index consists of a selection of value stocks from 23 countries, with the USA having the highest weighting of around 65%. The selection of the shares is based on the criteria of price/book value ratio, ratio of price to profit expectations, and the ratio of enterprise value to operating cash flow.
S&P 500 Value ETFs
The S&P 500 is the best-known stock index worldwide. So it is not surprising that there are numerous ETFs tracking the index, or a specific sector of the index. For example, there are some ETFs that invest in a selection of value stocks in the S&P 500, such as
- Vanguard S&P 500 Value ETF (VOOV)
- SPDR S&P 500 Value ETF (SPYV)
- iShares S&P 500 Value ETF (IVE)
The QIX Deutschland (Quality Index Germany), developed by TraderFox GmbH, consists of the “25 best German stocks, selected according to our proven set of rules”. The index was published in February 2016 and the percentage weighting of each company was 4 % at the start date. The only way to invest in the index is through index certificates.
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