Value Investing: How it Works, Example & Top Value Stocks in India

When researching the best investment strategies, you may have come across the term value investing. This strategy was invented in the 1920s by an American investor, professor and economist named Benjamin Graham, who is also known as the “Father of Value Investing”. 

Over the years, this investment tactic has been used by several behemoth investors, among whom Warren Buffet and Peter Lynch are some notable names. Let’s dive deeper into understanding how this strategy works!

What is value investing?

Value investing is an investment strategy in which long-term investors purchase stocks of those companies which have significant future growth potential but are currently undervalued. To find such stocks, investors analyse the financial information of organisations in order to determine their long-term prospects. 

They usually check the following: 

• Instances of financial scams in the past 
• Profit and loss accounts of previous years 
• Credit rating
• Price-to-Earnings (P/E) ratio
• Free cash flow
• Discounted cash flow
• Price-to-Book (P/B) ratio
• Earnings Before Interest and Taxes (EBIT)
• Earnings Before Interest, Taxes, Depreciation and Amortisation (EBITDA), etc.  

Then, upon finding such companies, they purchase their shares and hold on to them for the long term. Over the years, the stock prices increase exponentially, thus facilitating capital appreciation to the investors. 

What is the value investment strategy used by investors? 

Value investors have certain traits which set them apart from other investors. They do not get influenced by trends and rely on their own analysis for assessing market conditions. When it comes to adding stocks to their portfolios, they usually stay away from trending stocks and buy only those stocks that have solid financials. 

Moreover, these investors do not believe in the efficient-market hypothesis, which states that the stock price reveals all information about a certain company. Instead, value investors check the financial data of companies and long-term prospects to determine whether the stocks are overvalued or undervalued. Then, based on their research, they decide whether to invest. 

Also, value investors maintain their own margin of safety, depending upon their risk tolerance levels. This acts as a safety barrier in case any of their chosen stocks do not perform as per their expectations. 

Value investing example

To understand value investing better, let’s take the help of an example. 

Suppose you come across a start-up company named EV Automobiles Ltd. which has significant long-term growth potential. Its stock is trading at Rs.100/share, which you think is undervalued and should be around Rs.550. 

Now, you purchase 10,000 shares and hold on to them for the next 10 years. In the meantime, the company’s stock significantly appreciates in value, and its trading price rises to Rs.600 per share. This means that you will gain exponential returns after staying invested for 10 years. Based on your financial needs, you can sell shares and reinvest your profits by buying similar high-quality stocks. 

Value investing mutual funds

Value-based mutual funds are equity schemes which invest in undervalued stocks in order to facilitate long-term capital appreciation. Their fund managers follow the principle of value investing and therefore invest in only those companies which have solid growth potential. 

Individuals having a long-term investment horizon can consider purchasing units of such funds. They are also an excellent choice for people having a high number of growth stocks in their portfolios. In addition to offering benefits of diversification, value mutual fund investments can provide stable returns in all types of market conditions. 

Top 10 value investing stocks in India

Here are the top 10 value investing stocks in India that you can consider investing in:

Final Word

Value investing is perfect for investors having a medium risk appetite. Once they allocate their capital to stocks with high intrinsic value, their investment can grow manifold over time. However, to successfully implement this strategy, choosing the right stocks is necessary. Moreover, please remember that this is a long-term investment strategy. So, during times of short-term price fluctuations, you must remain undeterred. 

Frequently Asked Questions

Is Warren Buffett a value investor?

Ans. Yes, Warren Buffet is a value investor. He follows the strategy of identifying companies that are currently undervalued but have strong underlying growth potential. After finding such businesses, he invests in their shares and holds on to them for the long term. 

What is the value investing strategy?

Ans. The value investing strategy involves purchasing shares of companies which have strong growth potential and are currently trading at a price that is lower than their intrinsic values. Investors can choose to hold on to these assets for the long term in order to reap profits. 

What are the four pillars of value investing?

Ans. The four pillars of value investing are – Mr Market (a term used to describe a typical investor who trades based on emotions), Intrinsic Value, Margin of Safety and Investment Horizon. They were introduced by Benjamin Graham, who is known as the ‘father of value investing’. 

What is an example of a value investing company?

Ans. Suppose, there is a company called X, which has superb long-term growth potential. But, in comparison to its intrinsic value, its stocks are trading at a very low price of Rs.90. So, you purchase 20,000 of its shares and hold on to them for the next 15 years. 

During that time, the stock’s value increased to Rs.610. Thus, your investment of Rs.18,00,000 grew to Rs.1,22,00,000. This is a classic example of value investing.