Graham’s Disciples: Value Investing
Value investors are bargain hunters, and many investors describe themselves as such. But who is a value investor? In this chapter, we begin by addressing this question, and argue that value investors come in many forms. Some value investors use specific criteria to screen for what they categorize as undervalued stocks and invest in these stocks for the long term. Other value investors believe that bargains are best found in the aftermath of a sell-off, and that the best time to buy a stock is when it is down in price. Still others adopt a more activist approach, where they buy large stakes in companies that look undervalued and mismanaged and push for changes that they believe will unleash this value.
Value investing is backed by academic research and also by anecdotal evidence—the successes of value investors like Benjamin Graham and Warren Buffett are legendary—but it is not for all investors. We will consider what investors need to bring to the table to succeed at value investing.
WHO IS A VALUE INVESTOR?
In 2011, Morningstar, a widely used source of mutual fund information, categorized 2,152 equity mutual funds, out of 8,277 domestic equity funds, as value funds. But how did it make this categorization? It did so based on a simple measure: any fund that invested in stocks with low price-to-book value ratios or low price-earnings (P/E) ratios and high dividend yields, relative to the market, was categorized as a value fund. This ...