Value Investing

Value investors look for bargains: good companies whose shares are temporarily cheap because the market is overly pessimistic, has overlooked them or is focused on short-term problems.

The approach was developed by Benjamin Graham and David Dodd in the 1930s and popularised by investors such as Warren Buffett. A central idea is the margin of safety: buying only when the price is well below the estimated intrinsic value, to protect against errors in analysis or bad luck.

Value investors commonly use measures such as low price-to-earnings ratios, low price-to-book ratios, high dividend yields and strong free cash flow relative to price, combined with assessment of the company's financial strength and long-term prospects.

For example, a value investor might buy shares in a profitable manufacturer trading at 8 times earnings, believing its true value is closer to 14 times earnings once a temporary problem is resolved.

Value investing requires patience, as it may take years for the market to recognise a company's worth. The risk is falling into value traps: shares that look cheap but keep falling because the business is genuinely declining.