Esmé Faerber - All about Value Investing

Copyright 2014 by Esm Faerber. All rights reserved. Except as permitted under the United States Copyright Act of 1976, no part of this publication may be reproduced or distributed in any form or by any means, or stored in a database or retrieval system, without the prior written permission of the publisher.

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Buy and youll be sorry,

Sell and youll regret.

Hold and youll worry,

Do nothing and youll fret.

The traders lament

The traders lament epitomizes the agonies that every investor experiences when making investment decisions. The insight provided by the traders lament is that hindsight always produces the best results with 20-20 vision. Without clairvoyance into the future, however, investors are open to making investment mistakes. The aim of this book is to reduce the typical investment mistakes made. It is not possible to always be 100 percent correct in the investment decisions made, but knowing when investments are cheap and when they are expensive will decrease the error rate made by investors. Value investing is finding stocks that are trading at bargain prices and then selling them when they have risen in value to their fair or intrinsic values. This could mean waiting a long time, holding these stocks before they are recognized by the majority of investors.

This book illustrates the different value investment styles. Deep value investors look for undervalued stocks that have been temporarily beaten down for one reason or another, but the companies have strong balance sheets and competitive advantages that will restore the stocks value over time. Not all value investors are deep value investors. Growth stocks can come down in price as a result of circumstances and may present value at their lowered prices. Similarly, value investors could look for dividend yielding stocks that present value. If you believe that the business environment is not going to grow significantly, then value stocks that provide dividend yields are the answer. If on the other hand you believe that the economy is geared to growth, then growth stocks are the answer.

This book illustrates the different investment styles. After reading this book, investors should have a better idea of the value investment style that they feel comfortable with in assembling their investment portfolios.

Esm Faerber

There are two sides to every security transaction: a buyer of the security and a seller of the security. So it would seem that one of the two parties must be wrong. Not necessarily; one or both parties could make a profit, depending on the circumstances and the time. On the one hand, either the security has reached a price at which the seller thinks it will not rise any more or at which the seller wants to exit to realize an amount of profit. On the other hand, the buyer of the security thinks the security will rise in price and provide future profit. Consequently, both the buyer and the seller could realize profits over time.

Where or how does the value investor fit in this example? The value investor looks at the underlying aspects of the security to determine whether its price undervalues or overvalues the business to grow its future earnings (profits). The value investor buys the security when the price is less than the underlying value of the business and sells the security when the price is greater than the underlying value of the business.

Value investing can then be defined as looking for companies with strong fundamentals (good earnings, a strong cash flow) that are trading at bargain prices. Value investing is looking for businesses that are incorrectly valued by the market and can increase in value when the market recognizes that mistaken valuation. The astute reader will immediately question the contradiction of this previous statement, which is also negated by the efficient market hypothesis.

The efficient market hypothesis contends that stocks are always fairly valued, trading at their intrinsic values. According to the efficient market theory, information about companies is conveyed quickly and efficiently by the market, resulting in no underpriced stocks. In other words, when a stock is underpriced, investors will buy the stock, sending it up to its fair value, and when a stock is overpriced, it is sold by holders until it reaches its fair or intrinsic value. Consequently, there are no or very few undervalued or overvalued stocks.