BTL 896 - Value Investing

 

The Banking Tutor’s Lessons

BTL 896                                                                               06-05-2026

Value Investing

Value investing is an investment strategy that involves buying stocks trading at a significant discount to their intrinsic value, often coined as buying "dollar bills for 50 cents". Popularized by Columbia Business School professors Benjamin Graham and David Dodd in the 1930s, this approach views a stock not just as a trading ticker, but as a direct percentage of ownership in a real business.

Value investing is a disciplined, long-term investment strategy focused on purchasing securities at a price significantly lower than their intrinsic value.

The 4 Pillars of Value Investing

Intrinsic Value: The true financial worth of a business based on fundamentals like cash flows, assets, earnings, and competitive advantage.

Margin of Safety: The discount between the calculated intrinsic value and the market price. Graham recommended buying at two-thirds or less of true value to absorb analytical error or market downturns.

Market Inefficiency: A rejection of the Efficient Market Hypothesis (EMH). Value investors believe stock prices temporarily diverge from true value due to fear, greed, and short-term noise. The strategy relies on the market eventually recognizing a company's true value, which can take years.

Contrarian Mindset: Moving against prevailing market trends—buying when others are fearful and selling or holding cash when the herd is exuberant. 

Key Metrics Used by Value Investors

Price-to-Earnings Ratio (P/E): Low P/E  ratios compared to the industry average often indicate potential value stocks.

Price-to-Book Ratio (P/B): Used to determine if a stock is cheap relative to its assets.

Dividend Yield: High, consistent dividends are often favoured as they provide returns while waiting for price appreciation.

Value investing requires patience and the conviction to hold fundamentally strong companies during market downturns.

Sekhar Pariti

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