Value investing coined from Benjamin Graham‘s 1949 book, The Intelligent Investor.
Warren Buffet Popularly knowns as value investor (student of Benjamin Graham).
What is Value Investing in Stocks?
Picking Stocks that price lower than Intrinsic value (actual value). rather than premium-selling stocks.
Analyzing stock value with value investing formula
intrinsic or book value: or price to book:
first, understand the income statement (including PL, Balance sheet ). in Simple words if Company’s assets price higher than company trading price.
ex: company share market price 500 INR, but company book value per share (
Book value of a company=Total assets−Total liabilities
Shareholders’ Equity = Total Assets – Total Liabilities
Book Value = Shareholders Equity – Preferred Stock
BVPS = Book value / number of common shares
)
Total Common Stockholders Equity 20000
− Preferred Stock 200
Number of Common Shares -100
BVPS (Book value per share)= 198.00 // Market share price 100 INR. 98 INR 50%*profit margins on buying.
Market cap of a company=Current market price (per share)∗Total number of outstanding shares
ex: RIL market CAP
Price-to-Earnings Ratio – P/E Ratio:
useful to know its stock price selling on over price /premium or undervalued /discount.
P/E Ratio= Market value per share /Earnings per share (EPS)
earnings per share (EPS) = available in financial statement Total stock /number of shares
EPS: 50
Market share price: 1000
PE = 1000/50 = 20X higher price trading ( you are paying 1000 for earning 50 INR regardless of speculation of growth)
ex: trading price: 50, eps = 5
PE = 50/5= 10X (you pay 50 for earning 5 INR)
Avg PE ratio in stock (maybe 20-25% considered as good varies industry to industry)
Ex: if you buy a house for 50 lakhs, rent yield per month (5000*12=60K) and the PE ratio = 60000/5000000=0.012 or 1.2% yield or returns. if you do FD at 10% annual 5 Lakhs monthly 41666 (42K earnings)
(you are paying 50 lakhs for earning 60,000 per year or 5000 per month regardless of speculation of growth)
Free cash flow
after deducting operating and capital expenditures. when cash flows top to bottom of the balance sheet. check the positive and negative cash flow in the cash flow statement when you do a fundamental analysis of company stock.
Discounted stock price vs premium trading stock
The margin of Safety:
buying lower than the actual value with a margin.
ex: buying the 100 INR stock at 60 INR then the margin of safety is 40%.
According to benjamin graham, undervalued stocks priced at least below 1/3rd (33%) of stock intrinsic value.
and many more valuation factors like PEG ratio etc.
Value investing in real estate and other sources
- Buying house lower than its market value and selling at higher than market value or at market value. also called as house flipping.
- Car flipping: buying at low made few changes sell at high.
- Domain /website flipping: buy low sell high.
- Most people do buy an Open plot and wait for growth (usually 10% CAGR growth or double in (3 >>24%)-(5>>14.4%) years) if 10% growth every year 7.2 years it will be double.