Value investing

Value investing
Katrina.Tuliao · CC BY 2.0 · source
Name	Value investing
Founded	1920s
Founders	Benjamin Graham, David Dodd
Notable practitioners	Benjamin Graham; David Dodd; Warren Buffett; Charlie Munger; Seth Klarman; Walter Schloss; John Templeton; Irving Kahn; Howard Marks; Joel Greenblatt

Value investing is an investment approach that seeks to purchase securities trading for less than their intrinsic worth, often identified through financial statement analysis, market behavior, and capital allocation patterns. Proponents draw on the analytical frameworks developed at institutions such as Columbia Business School, writings published in outlets like The Wall Street Journal and Financial Times, and case studies involving corporations such as General Electric and IBM. The approach has influenced investors, asset managers, endowments such as the Harvard Management Company and sovereign funds, and has been debated in markets including the New York Stock Exchange and London Stock Exchange.

Overview

Value investing emphasizes buying securities—typically equities—priced below the investor's estimate of intrinsic value, often measured by discounted cash flow models, balance-sheet metrics, or liquidation analyses. The method contrasts with approaches advocated by proponents associated with Growth at a Reasonable Price debates, proponents from the Fama–French literature, and techniques used by traders active in venues such as Chicago Board Options Exchange. Value investors monitor corporate actions by firms like Berkshire Hathaway, evaluate management from companies such as Procter & Gamble and Coca-Cola, and consider macro shocks exemplified by events like the 1973 oil crisis and the 2008 financial crisis.

History and development

Origins trace to academics and practitioners at institutions including Columbia Business School in the 1920s and 1930s, notably professors from Columbia University who taught and published analyses on securities valuation. Seminal texts were authored following episodes like the Wall Street Crash of 1929 and during periods involving regulators such as the Securities and Exchange Commission. The approach evolved through practitioners associated with firms such as Graham-Newman and later funds run by alumni linked to Harvard University and Wharton School. Postwar developments intersected with debates sparked by research from scholars at University of Chicago and results reported in journals like the Journal of Finance, while market events including the Dot-com bubble and the Global financial crisis of 2007–2008 shaped tactical adaptations.

Principles and valuation methods

Core principles include margin of safety, mean reversion, and fundamental analysis of cash flows and net assets; techniques draw on models such as discounted cash flow (DCF), net asset value (NAV), and earnings power value. Analysts apply accounting scrutiny used in audits by firms like PricewaterhouseCoopers and Deloitte and evaluate governance issues documented by organizations such as Securities and Exchange Commission. Valuation methods incorporate inputs from financial statements prepared under standards like Generally Accepted Accounting Principles and International Financial Reporting Standards, and also consider restructuring examples seen at companies like Eastman Kodak and General Motors. Empirical assessment sometimes references factor models advanced by researchers affiliated with Massachusetts Institute of Technology and University of Chicago Booth School of Business.

Strategies and portfolio construction

Practitioners deploy strategies ranging from concentrated long-term equity positions used by investment vehicles such as Berkshire Hathaway to diversified value funds managed by firms including Vanguard and BlackRock. Tactics include deep-value special situations, activist engagements akin to campaigns by Elliott Management Corporation, and relative-value arbitrage used by hedge funds like Citadel LLC. Position sizing, risk management, and portfolio construction draw on asset allocation rules observed at endowments such as the Yale University model and insurance companies like MetLife. Execution spans markets on exchanges such as the Nasdaq and over-the-counter venues, and may incorporate derivative overlays traded on platforms like the Chicago Mercantile Exchange.

Performance, criticisms, and risks

Empirical studies by researchers at institutions including University of Pennsylvania and Columbia Business School have documented periods of outperformance and extended underperformance relative to market-cap indices like the S&P 500. Criticisms have emerged from proponents of the Efficient-market hypothesis and from analysts influenced by the Behavioral finance literature at universities such as Harvard University and University of Chicago. Risks include value traps exemplified by firms that fail to recover after secular decline, corporate governance failures investigated by agencies such as the Department of Justice, and systemic shocks like the COVID-19 pandemic that altered industry fundamentals. Regulatory shifts from bodies such as the Federal Reserve and accounting changes by standard setters such as International Accounting Standards Board also affect valuation dynamics.

Notable practitioners and schools of thought

Key figures include academics and investors associated with institutions such as Columbia Business School and Columbia University—notably Benjamin Graham and David Dodd—and later practitioners like Warren Buffett of Berkshire Hathaway and Charlie Munger of Daily Journal Corporation. Other notable investors are Seth Klarman of The Baupost Group, Walter Schloss of firms originating in New York City, John Templeton who established funds active on markets such as the London Stock Exchange, Irving Kahn, Howard Marks of Oaktree Capital Management, and Joel Greenblatt known for teaching at Columbia Business School and managing funds in New York City. Schools of thought include traditional Graham-Dodd value, modern factor-based value advanced by researchers at Massachusetts Institute of Technology and University of Chicago, and activist value approaches practiced by investors from firms like Elliott Management Corporation and Third Point LLC.

Category:Investment strategies