Styles

Value investing

Buying a business for meaningfully less than you think it is worth.

The central idea, from Benjamin Graham, is the margin of safety: pay so far below your estimate of intrinsic value that you can be somewhat wrong and still not lose money.

It is frequently confused with buying statistically cheap stocks. It is not. A low P/E company in terminal decline is not value, it is a trap. Value requires that the business is worth more than the price, which demands a judgement about the future, not merely a screen of the past.

Figure

The order matters more than the maths

Do I understand how it makes money?1st

Does it actually make money?2nd

Will it survive a bad year?3rd

Is it cheap?last

Cheapness is the last question. Ask it first and you produce a list of companies the market has given up on, and it is usually right.

Why it matters

It is the discipline that forces you to have a reason, and a number, before you buy.

The mistake everyone makes

Equating 'cheap' with 'value'. The cheapest things on any screen are usually cheap for excellent reasons.

Related terms

Economic moat

Whatever stops competitors from competing away a company's profits.

DCF

Valuing a business as the sum of all the cash it will ever produce, in today's money.

P/E ratio

How many years of current profit you are paying for the shares.

See Value investing on a real company

SteadyShares pulls this straight from the filings for 1,100+ companies, alongside moat scores, DCF fair value and peer comparison. Free to look around.

Open SteadyShares