Value Investments

Value investments are those under which the investors look to maximize refunds by searching for stocks that are undervalued by the market. Value fund managers are on the lookout for companies who have strong fundamentals but have fallen out of favour due to some reasons. The stock prices of such companies are not the real determinants of their worth. Value investors carry the opinion that the stocks of a company may be overpriced or under-priced relative to its true value. They reject the efficient-market hypothesis that states that the stock prices reflect the true value of a company.

The intrinsic value of the stock is assessed by using a valuation method such as discounted cash flow analysis. This value is then compared with the value of the stock price. Investment decision is made if the intrinsic value is greater than the market value by a pre-determined amount. Value investments require a long-term investment horizon and a contrarian mindset. This type of strategy has been shown to outperform index returns across multiple equity markets, if one looks down at history. Mostly, investors who see growth investment as expensive and overvalued, prefer value investment.

Main features of value Investments:

Lower prices when compared to broader market: Value investing rests of the assumption and hope that stocks of good companies will bounce back in future as the investors realise the true worth of the company.

Lower risk than broader market: The value investments take a longer time as compared to growth investments to turn around. They are more suited to long-term investments and they are also likely to carry higher risk of price variations.

Their price lies below similar companies in the industry: It is seen that the prices of value investments are quoted at prices below similar companies in the same industry. These are undoubtedly priced cheaper and lower than the growth investments.

It has been noticed that the value investments tend to perform good in event of early economy recovery but after that, they tend to slacken a little when the bull market is sustained. One of the important rules in value investments is keeping a margin of safety.

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