What is Value Investing?

 


Value investing is a type of investment strategy which looks to select equity stocks from companies which are deemed to be trading for less than their value. An investor who is seeking value investments looks at stocks they feel have been undervalued by the market, either due to a sudden shock announcement or because the company is early-stage and therefore not valued highly.

They will invest in stocks with lower than average price-to-earnings or price-to-book ratios, or ones which boast higher dividend yields. Value investors try to take advantage of what they label as investor irrationality, where everyday events can ‘spook’ investors to try to sell stock. 

 


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Generally speaking, value investing is a long-term investment strategy which seeks to mitigate and even take advantage of the shocks that occur in the market. A value investor feels that the market reacts too strongly to good or bad news. They look for the intrinsic value of the business, which is to say that they look at what the business is worth if someone wants to buy the whole business. 

By its nature therefore any investment portfolio of this type is likely to have peaks and troughs, though as long as the general trend is upwards this is will not overly concern the investor.  

 


However, given that any two investors are likely to attribute a different value to any stock, it is critical that an investment has a certain margin of safety. This means that value investors look to buy shares at a particularly low price to mitigate the fact that prices can move in a way that they did not predict. This has been referred to as a 'moat' by Warren Buffet, as it is his defence against shorter term shocks. 

How is it different from Angel Investing?


While angel tend to invest uniquely into early-stage companies, value investors tend to have a diversified range of investments in companies at different stages. The one thing all investments have in common is the idea that the stocks have been bought at a lower value than their actual worth.

 


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