What is value investment?

1. Three major features of the financial market

(1) The prices of the financial securities are governed by some factors which have far-reaching influences but are unpredictable. Graham personates these non-human factors which govern the values of the securities and calls them as “Mr. Market”.

(2) Although the market prices of the financial assets fluctuate all the time, a lot of assets have their relatively stable basic economic values, namely, intrinsic values. A well-trained and diligent investor can measure the basic economic values precisely and rationally.

(3) If an investor buys a security when its market price is significantly lower than its intrinsic value, definitely, he will receive an excessive return at the end. Graham defines the gap between the value and price as the “safety margin”.

2. Definition of value investment

Firstly, a value investor shall evaluate the basic value of a financial asset and compare it with the market price of this financial asset. If the price is lower than the value, and a sufficient safety margin can be achieved, he shall buy this security. We can deem this rule as the key to Graham’s  and Daud’s value investment theory.

3. Value investment procedure

Step 1: select the security for evaluation;

Step 2: Estimate the basic value of the security;

Step 3: Calculate the rational safety margin of the security;

Step 4: Determine how many shares to buy, including structure of the portfolio and diversification degree;

Step 4: Determine when to sell.

This article is excerpted from “Series Publicity Brochures for Protecting Investors” edited by Tianjin Securities Association under sponsorship of CSRC Tianjin Bureau. We hope that this article can direct the investors to establish correct investment concepts and intensify their risk prevention consciousness.