Value investing, also known as Value Investing in English, is a long-term investment strategy that focuses on the company itself, focusing on selecting listed companies whose market value is lower than their intrinsic value. When the market value of a stock truly reflects its intrinsic value, investors can benefit significantly. This may sound simple, but it is not easy to actually do it. Therefore, value investors often need to investigate the fundamentals of listed companies, such as price-to-earnings ratios, price-to-sales ratios, debt-to-equity ratios, etc. These data can often be found in major brokerages. For example, Futu moomoo provides important information such as financial statements and price-earnings ratios for each stock. The concept of value investing was first proposed by Columbia Business School professors Benjamin Graham and David Dodd in their 1934 book "Security Analysis". The article gave a different judgment point for opening a position and depositing money. Then in 1949, Graham mentioned this concept again in his other books and popularized it, which was recognized by many elites in the investment community. Among them is the recognition and compliance of Warren Buffett, a student of Graham and the famous investment guru. In his subsequent investment path, he added personal characteristics to the initial concept of value investing and obtained considerable personal gains. What are the key points of value investing? How to determine whether a stock price is lower than the stock's intrinsic value and whether to decide to buy creates the key to value investing. Determining whether the stock price is lower than the intrinsic value of the stock requires a large amount of data analysis. It not only analyzes the stock company's own situation (fundamental analysis), but also analyzes its development in the industry to which it belongs. There will be a large amount of data. How investors find the most useful data in these complex data is a reflection of the level of personal ability. Whether or not to decide to buy is the biggest difference between value investors and ordinary investors: in traditional financial investment, market conditions are often linked to the emotional atmosphere of investors. When it falls, everyone is worried and reduces their positions and sells. When the price rises, most investors follow the trend and increase their positions one after another with optimistic sentiments. The reason why many value investors have achieved such astonishing returns is often because they persisted in their analysis and judgment and started buying stocks when they believed that the stock price was lower than the intrinsic value of the stock. When the stock price truly experiences its own value or even exceeds it, the returns of value investors are very objective. The most difficult part of value investing is to judge the timing of purchase. Although you are buying discounted products, as physical consumption, there are similar products on the market for price reference, and merchants will give discount notices, or for example, year-round off-season promotions, etc. Buyers can roughly judge when it is most beneficial for them to buy. However, in the financial investment industry, there are many factors that cause a company's stock price to fluctuate, and there are usually no obvious indicative warnings. Therefore, those who can correctly judge the buying point are usually top value investors who are worshiped as masters. What criteria do value investors generally focus on in a company? Analyzing a company's financial situation is the most common work done by value investors. When analyzing, they usually focus on a company's financial statements, price-to-earnings ratio, price-to-book ratio, debt-to-equity ratio, free cash flow, and PEG ratio and other data. 1. Financial statements Financial statements are data sheets that listed companies must submit to the U.S. Securities and Exchange Commission (SEC) every quarter and year. Investors can find them on the SEC website, or on the website of listed companies. The financial report shows the company's operating performance for the current quarter or year. In addition to the common data, value investors will also pay attention to the notes section of the report. This section will explain the company's financial situation for the current quarter or year in more detail, as well as some non-routine financial conditions, such as the company encountering unexpected accidents, etc., to explain some data in the report more clearly, so as to have a more complete understanding of the target company's operating conditions and operating performance. In Futu moomoo, you can easily find the financial statements of listed companies. The following is a screenshot of the Futu moomoo mobile version:
If you are using Desktop, you can press F10 on each stock page to view the financial statements of listed companies. 2. P/E ratio Price-to-Earnings Ratio in English, or P/E value for short, shows the price that the current market is willing to pay for a stock. Value investors will use this value as one of the basis for judging whether the current stock price is overvalued or low. If the P/E ratio is high, it may mean that the stock is expensive relative to earnings, or is overvalued. Conversely, a low P/E ratio may mean that the current stock price is cheap relative to earnings. So, for value investors, the lower the P/E ratio, the more likely the company is considered a value stock. However, the P/E ratio also has its own limitations as a reference value for analysis, and the P/E ratio can be used to compare different companies in the same industry. It is meaningless to compare companies across industries, so value investors will use the P/E ratio as a reference value rather than guiding data. You can easily find the P/E value of listed companies on Futu moomoo: If you are using the computer version of Futu moomoo, you can also find the price-to-earnings ratio (P/E Ratio) of listed company stocks: Further Reading: What is the P/E Ratio: Are Cheap Stocks Really Cheap? 2. Price to Book Ratio Price-to-book ratio, in English, is Price-to-Book Ratio, referred to as P/B value. This ratio reflects the difference between the market value of the company's stock and its book value. Generally speaking, the larger the ratio, the higher the market value, and the lower the ratio, the lower the market value. For value investors, they prefer to look for companies whose market value is lower than their book value. When they determine that the current market value is too low after combined analysis with other data, they will buy. When the company operates normally and reflects its true value in the market, value investors will benefit. You can easily find the P/B value of listed companies on Futu moomoo: If you are using the computer version of Futu moomoo, you can easily find the price-to-book ratio (P/B Ratio) of listed companies: Further Reading: What is the Price to Book Ratio (P/B Ratio)? How is it used to evaluate stock value? 3. Debt to equity ratio Debt-to-Equity Ratio in English, referred to as D/E value, this value shows the ratio between the debt generated by the company for financing development and its shareholder equity. The higher the D/E value, it means that the amount of financing it obtains through debt is higher than the amount of financing it obtains through selling stocks, which means that in the company's financing situation, debt income is higher than equity income. When the company's operating income cannot meet the debt repayment, each shareholder's investment in it, whether long-term or short-term, will have greater risks. Because industry characteristics are different, D/E values are usually compared among the same industries to accurately determine whether the company's current D/E value is reasonable. 4. Free cash flow Free cash flow, or FCF in English, is the disposable cash remaining after the company generates cash through its operations minus expenditure costs. This value shows the efficiency of the company's operations in generating cash, and is one of the indicators for value investors to estimate the company's future earnings growth potential. Companies with a growing free cash flow trend will increase their future earnings, and investors are more likely to receive investment returns. If the stock price is low during the same period, it will become the focus of value investors. If you use Futu moomoo, you can find the free cash flow option of listed companies in the software. Further reading: What is free cash flow? How to use P/FCF valuation 5. PEG ratio The PEG ratio, which stands for Price/earnings-to-growth ratio, measures the relationship between the current stock price and earnings growth of a company's stock. By comparing current earnings to expected earnings growth, you can get a more complete picture of whether a stock is currently overvalued or undervalued.
Generally, a stock with a PEG value below 1 is considered undervalued because it indicates that the current stock price is too low compared to expected earnings growth, and is usually what value investors pay more attention to. Futu moomoo’s advantages for value investors For value investors, obtaining more operating information of target companies is the main way for them to make analysis and judgment. As individual investors, this can be obtained through many channels. Through some professional trading platforms, such as Futu moomoo, etc., almost all required information can be obtained on one platform, simplifying the data collection process. At the same time, if you open an account and deposit money now, you can also get free US stocks. Futu moomoo account opening At Futu moomoo, investors can get: Real-time stock market data updates allow you to understand the stock market situation in a timely manner and analyze the dynamics of target companies in the same industry. Free secondary market data, real-time secondary market data, and understand the most accurate dynamics of the target company's stock price. The stock short selling data is updated daily to accurately understand the development trends of the target company in the market and avoid abnormal stock prices caused by human operations, which may affect your own judgment. With advanced and comprehensive data analysis tools, all required data values are clear at a glance, eliminating the trouble of back-and-forth checking and comparing data, and making a more accurate judgment on target company stocks. Artificial intelligence monitoring: During the long-term holding period, AI intelligently monitors the stock price trend, and you can check the values regularly to understand the development trends of investment objects, saving more time and energy. Provide global market data analysis to meet the investment needs of different regions. Futu moomoo even provides the following information exclusively to help value investors make better target selection and investments: The list of star institutional holdings helps junior value investors learn from the experience of the masters. The curated list of market highlights also brings more useful guidance to junior value investors. Visualize company financial analysis reports, visualize traditional reports, and greatly simplify data analysis and other tasks. Stock comparison tool, simple steps to understand the value of the stock price relative to the company itself, as well as the development level in the same industry. An active community composed of 14 million users and a wealth of investment courses meet the needs of junior value investors to get started quickly and intermediate investors to effectively improve. Books about value investing 1. "Security Analysis"/"Security Analysis" Author: Benjamin Graham & David Dodd @Amazon Affiliate Link This book was first published in 1934 and is one of the most influential books in the financial industry. The book brings more specific value investment concepts and introduces a variety of value investment techniques. In its subsequent editions, the author Benjamin Graham’s protégé and investment guru Buffett wrote a preface, which established its position in the history of financial books. 2. "The Intelligent Investor: The Definitive Book on Value Investing" Author: Benjamin Graham & Jason Zweig The Chinese translation of this book is "The Intelligent Investor: The Authoritative Book on Value Investing". Since Benjamin Graham proposed the concept of value investing in 1934, he established the term "value investing" in this book published in 1949, thus starting a new investment strategy in the financial investment world. In this book, Benjamin Graham, the greatest investment advisor of the 20th century, teaches and inspires people all over the world to make sound value investments in detail. 3. "Berkshire Hathaway Letters to Shareholders" Author: Warren E. Buffett
The book compiles every letter sent by "Stock God" Buffett to shareholders from 1965 to 2018. The letters are complete and unedited, and even include letters from 1965 to 1976 that are not available on Berkshire's website. The various guidance provided by Buffett in the letters are called "lesson plans" by the world. Buffett does not hesitate to share his experience and opinions in detail with shareholders. 4. "Beating the Street" Author: Peter Lynch In this book, legendary fund manager Peter Lynch explains his investment strategy in detail, and provides exclusive advice on how to select stocks, mutual funds, or combine the two for portfolio investment. Readers can use the expert advice brought by the "Nation's No. 1 Financial Planner" to develop a successful investment strategy for themselves. 5. "The Dhandho Investor: The Low-Risk Value Method to High Returns" Author: Mohnish Pabrai Indian elite businessman Mohnish Pabrai lists the advantages and investment framework of value investing in this book in a simple and easy-to-understand manner. The book expands on the investment concepts of Benjamin Graham and Warren Buffett, and combines his own successful experience to allow readers to understand Mohnish Pabrai's own Dhandho investment framework in a relaxed and interesting reading experience. 6. "Invest Like a Guru: How to Generate Higher Returns At Reduced Risk With Value Investing 1st Edition" Author: Charlie Tian This book is written by Charlie Tian based on his actual investment experience. It not only provides readers with positive guidance for success, but also describes his own failure experience to provide readers with more comprehensive investment guidance. The information contained in the book not only includes expert-level insights, but also provides many practical tools and operating methods with practical operation value. It is a guiding book that many entry-level value investors should not miss. Who are the world-famous value investors? 1.Benjamin Graham Graham is an American economist, economics professor and investor born in the United Kingdom. He is the proposer of the concept of value investing and is known as the "Father of Value Investing". He is the professor and mentor of investment guru Warren Buffett. He has published two books of great significance in the history of financial investment: "Security Analysis" and "The Intelligent Investor". 2. Warren Buffett Buffett is the most famous value investor today and the most famous business magnate and philanthropist in the United States. Buffett currently serves as Chairman and CEO of Berkshire Hathaway. Buffett has shown enthusiasm for investing since he was young. Later, he studied under Benjamin Graham and brought his value investment philosophy to the extreme. His years of successful investment experience have earned Buffett the title of "Stock God". His famous saying: "Better to buy a wonderful business at a fair price than a fair business at a wonderful price." is regarded as an investment guide by many investors. 3. Charlie Munger Charlie Munger, the vice chairman of Berkshire Hathaway, is better known as Buffett's partner. Their cooperation created a legend of a return on initial value of up to 2,000,000%. The reason why he is not as famous as Buffett is because he is a person who pays more attention to his own steps. His investment style is the same as his behavior. He focuses on his own rhythm, finds goals that he thinks are worth investing in, and sticks to them.
Even Buffett commented on him: "Moving to the beat of his own music, which almost no one else is listening to." For value investing, doing this is the rarest and most important thing. For example, he can calmly look at the current rise of "Special Purpose Acquisition Companies." The full English name is, Special Purpose Acquisition Companies. (SPACs), does not follow the trend but sticks to his own point of view, and compared to most investors who buy multiple stocks to achieve their own risk diversification purpose, he prefers to find a few stocks that he is familiar with. 4. Peter Lynch Peter Lynch is a well-known American investor, mutual fund manager and philanthropist. Lynch's strong interest in the investment field and his active academic achievements enabled him to enter the Magellan Fund in 1977. Within a dozen years, the Magellan Fund quickly became a popular fund with an astonishing annual return of 29.2% per year. Under his management, the assets under management of the Magellan Fund increased from US$18 million in 1977 to US$14 billion. This performance was regarded as "legendary" in the industry. Peter Lynch's personal investment principle, "Invest in what you know" has become a guide for many value investors. 5. Seth Klarman Seth Andrew Klarman is an American billionaire, top investor, hedge fund manager and author, and an active advocate of the concept of value investing. Klarman currently serves as CEO and portfolio manager of Baupost Group. During Seth Andrew Klarman's investment journey, it was known for following the investment philosophy of Benjamin Graham, buying unpopular assets when they were undervalued, developing a reasonable margin of safety and profiting from price increases. Since Klarman founded the Baupost Group fund in 1982 with $27 million, he has achieved a compound investment return of 20% and currently manages $27 billion in assets. 6. Mohnish Pabrai Mohnish Pabrai followed Buffett's investment style. In 1991, he withdrew US$30,000 from his 401(k) account and US$70,000 from his credit card to start TransTech, Inc., an IT consulting and system integration company. In 2000, Pabrai sold the company to Kurt Salmon Associates for $20 million. Before selling the company in 1999, Mohnish Pabrai became a partner of the Pabrai Investment Funds hedge fund, inspired by Buffett Partners. Subsequently, Mohnish Pabrai continued to expand his investment areas and investment business, becoming a successful value investor. 7. Joel Greenblatt Joel Greenblatt is an American academic, hedge fund manager, investor and author, and a value investor. Greenblatt served as chairman of the board of Alliant Techsystems from 1994 to 1995 and became a founder of the New York Securities Auction Company. In 2005, Greenblatt published his book "The Little Book that Beats the Market" In the book, he introduces an investment strategy called "Magic Formula Investing," an investment strategy that helps investors find "cheap and good companies" that can bring investors high returns on capital. 8. Bill Ackman
Bill Ackman, whose full name is William Albert Ackman, is a well-known American investor and hedge fund manager. He is an activist-style value investor. His first criterion for investing is to "make a bold decision that no one believes in." Some classic cases include shorting MBIA's bonds during the 2007-2008 financial crisis, his proxy fight with Canadian Pacific Railway, etc. His behavior, investment style and success stories have always been controversial, but this still cannot stop some government officials, hedge fund experience or retail investors from praising him. 9. David Tepper A successful businessman and famous philanthropist, he founded Appaloosa Management Company and became one of the most successful hedge fund managers. David Tepper adheres to an investing strategy that requires a lot of research and a little bit of luck. He believes that luck is the key to an investor's success, but the prerequisite for getting luck is that you are smart enough to discover and seize luck in time. In the field of value investment, he insists on selecting target objects after extensive research and analysis. Often, after smart research, he can be lucky enough to invest in the right object. 10. Carl Icahn Carl, one of the most successful investors on Wall Street, adopts a value investing philosophy. He focuses more on a company's assets and potential productivity than most investors on Wall Street focus on corporate earnings. When deciding on investment targets, he usually adopts a variety of strategies such as: studying its business potential before investing, investing in undervalued assets, paying attention to the pricing power of the company, not making impulsive decisions easily and not doing nothing, avoiding a herd mentality, and making big bets on his best ideas. In the end, the concepts he adheres to have also brought him a lot of profits. What are the characteristics of value investing? 1. Don’t pay much attention to short-term market conditions Market analysis is an analysis that most investors must perform when choosing investment objects, but for value investors, this task is almost ignored. They often only analyze the target company's operating capabilities, company assets, and past performance, etc., and then compare the current stock with the company's financial capabilities to determine whether its stock price is lower than the intrinsic value of the company's stock. 2. Don’t follow the crowd Value investors who go against the trend often give people the illusion of being dictatorial. They will not continue to invest with everyone when everyone is cheering for the rise of the stock market, nor will they step up the panic of withdrawing funds when everyone is sad about the decline of the stock market. Value investors are almost not affected by the overall sentiment of the market. They always watch the stock market like an outsider, or concentrate on their own research and analysis. They will focus on the stocks they are interested in and check the company's operating conditions, without paying attention to the buying guidance of the company in the general environment. Then they will make some decisions that are different from the general trend of the market, such as adding positions when no one is optimistic about them. Successful value investors often have very good determination and can concentrate on their target stocks regardless of the surrounding environment. 3. Requires strong psychological quality Value investment is often a long-term investment. Unlike short-term investment, value investment values the returns brought about by a substantial increase in the company's value after long-term operations, rather than obtaining small price differences in short-term fluctuations. In the long-term investment process, whether the company's stock value increases at a rate consistent with expectations, whether the original investment confidence will be shaken when the value fluctuates or slows down, and whether the investment philosophy can be adhered to in a pessimistic environment, all these will determine the success or failure of value investment. Looking back at the experience of value investment masters, we can see that almost all of them have a strong psychological quality to face all situations during the holding period of the target stock. They make investment an art of playing with time and themselves. 4. Not diverse In traditional or most investment strategies, diversifying one's investment assets is an almost universally accepted way to reduce risk, while this is not strongly promoted in value investing strategies.
However, value investors do not adopt the investment method of putting all their eggs in one basket. They will also invest in multiple stocks and just select a few target stocks in different industries or economic sectors to achieve the purpose of diversifying investment risks without being too diversified. Value investors search for target stocks in several areas and then invest, rather than spreading their funds among multiple recommended or promising stocks based on market trends like most investors do. 5. Set a safety margin Margin of Safety, also known as Margin of Safety in English, is one of the keys to the success of value investors. Because value investing is a long-term investment, the return on investment will not be reflected immediately when selecting and deciding on a target, so they usually set a safety margin based on their own investment style and risk tolerance, which is the acceptable error space for the expected value of the target stock. In this way, if the stock price performance is ultimately not as good as expected, the safety margin setting will allow investors to stop investing in time, withdraw funds, and avoid losses. What are the differences between value investing and deep value investing? Deep value investing, also known as Deep Value Investing in English, was proposed by Buffett’s teacher Benjamin Graham; Value investing in English is Value Investing, mainly proposed by Warren Buffett; From a time perspective, deep value investing precedes value investing. At the same time, the perspective of value investing comes from deep value investing. Benjamin Graham, the father of value investing, first proposed the concept of value investing in 1934. He set the investment standard for stocks based on the company's own value and its current stock value, and compared the prices. As long as the company's stock price is lower than the company's value, it is considered an investable object. This is the concept of deep value investing. Later, Benjamin Graham's apprentice and later investment guru Warren Buffett introduced company quality as an additional reference standard based on his mentor's concept. That is to say, when the company's stock price is lower than the company's own value, only companies with good operating conditions are worth investing in. This became the mainstream value investment concept later. A simpler metaphor between the two could be: Deep value investing is about buying only what is cheap, regardless of quality; Value investing means not only buying cheap things, but also buying things that are both cheap and of good quality. What is the difference between value investing and growth investing? Value investing and growth investing can be said to be the two main forces in the field of financial investment, and each has its own characteristics. growth investing Stock prices are higher than the market, with investors favoring companies with high P/E ratios and hoping to profit by selling at a higher price in the future as the company continues to grow. The company's stock price fluctuates more than the broader market because the company's high stock price is easily affected by various negative news in the market and causes large fluctuations. Growth investments place more emphasis on the company's external business growth. value investing The stock price is lower than the market. Investors are more optimistic about companies with low current price-to-earnings ratios. They are optimistic that the company's value will be discovered and recognized by the market in the future, and they can obtain high returns through value parity. The company's stock price fluctuates relatively smoothly and the risk is relatively small. Because it takes time to realize the value of a target company, value investing is more suitable for long-term investors. Value investing focuses more on the intrinsic value of the company.