- Warren Buffett is arguably one of the best investors of the 20th century.
- He has made his mark, investing in undervalued companies and holding on to them till he does not find anything wrong with the business or its management.
- Although value investing is one of the oldest strategies in the stock market, it has stood the test of time.
Warren Edward Buffett, the CEO of Berkshire Hathaway, also known as “the oracle of Omaha,” is an idol for a lot of investors, both budding and seasoned. The legendary investor has made his mark in the investment community by handpicking companies that eventually went on to make him one of the richest men in the world.
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He is arguably one of the best investors of the 20th century. Through his excellent investment strategy, he has reached millions of people around the world. So, what exactly is Buffett’s strategy and how does he separate the wheat from the chaff?
What is Buffett’s forte – growth or value investing? ?
To not much of everyone’s surprise, Warren Buffett is the epitome of successful value investing. This has also to do with his teacher, Benjamin Graham, the author of famous book “the intelligent investor”, who is considered to be the father of value investing. He surely likes businesses that have a competitive edge, “a moat”, which he often quotes but does not shy away from passing on the opportunity if the price is not right.
One of the most important questions Warren Buffett asks himself is: Is the business fairly undervalued? Of course, there is not one answer to that as there are numerous ways to value a business. Also, an investor’s knowledge, experience and understanding about the business or respective industry, tend to influence the valuation process. But according to Buffett, if the business is not rightly priced, then he keeps looking for ether stocks till he finds one.
So far, it is clear that Buffett has made his mark, investing in undervalued companies and holding on to them till he does not find anything wrong with the business or its management. But before taking a brief look at how value investing has made him what he is today, we first need to understand what exactly value investing is?
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What is value investing?
Value investing is a popular approach to investing, which involves buying stocks or securities that are quoting at a lower price than what they are worth. In other words, value investing helps an investor identifying undervalued securities, that are trading below their intrinsic value. Value investing was popularised in the investment world by Benjamin Graham and David Dodd, way back in the 1920s.
It may seem easy to go out and just buy undervalued securities to become the next Warren Buffett (or closer to him), but Value investing is not that easy. The knowledge and skills required to identify the true value of a business like Buffett is not a game of mere excel sheets. Finding the intrinsic value of a share is the most difficult part which is determined by doing fundamental analysis of the company. Once the true value (intrinsic value) has been determined, the strategy then capitalises on an assumption that sooner or later the market would price that security at its intrinsic value, hence finishing the gap between the current value and the intrinsic value. This valuation gap is the potential profit that a value investor aims for.
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Therefore, value investors are constantly on a hunt for securities that “in their opinion” are trading below their intrinsic value. They also take the opportunity of temporary market reaction, which is often caused by a good or a bad event such as the recent COVID-19 pandemic, to buy stocks at quite a bargain. The assumption behind buying stocks at these knee-jerk reactions, is there is no change in the fundamentals of the underlying business, and its just a temporary noise that has created such a value gap.
More often than not, these reactions revert to their mean or at the price quoted before the abrupt selling, giving a quick buck to those who spotted this valuation gap in time.
Although value investing is one of the oldest strategies in the stock market, its among one of the strategies the stock market genius Warren Buffett swears by. Also, the strategy has stood the test of time and even in today’s financial markets of higher volatility, algo-based participation and other fundamental changes that have taken place over 100 years, the strategy didn’t’ seem to have lost its shine.