Value investing is more of a habit than an investment process.

Value investing focuses on the market price of a stock that is lower than the “underlying business value.” Few value investing stalwarts like Warren Buffett, Benjamin Graham, John Burr, and Philip Fisher, who have popularized the concept of value investing, believe that it is very important to know the “value of the business” before buying stocks. If a company’s value is greater (by a multiplier factor) than the current market price of its shares, it automatically becomes a good buy. We will discuss three principles of value investing:

(1) Maintain a margin of safety.

Value investors make sure before they buy shares that their current market price is substantially below their “value.” As a general rule, the market price of a stock should be 2/3 of its calculated book value. But it must be said here that the book value is not the real value of a business, it does not take care of other non-tangible values.

(2) Estimation of intrinsic value.

The intrinsic value principal is based on a theory that “a dollar available today is worth more than a dollar paid in the future.” This happens not only because of the inflation of money, but also because if one has dollars in hand today, he can invest them in deposits and earn additional interest on his investment. So, according to intrinsic value, core investors estimate a company’s intrinsic value (say 10 years from now) based on its current market price.

(3) Evaluate long-term prospects

Value investors think almost the opposite of traders. Traders are more focused on the short-term prospects of a particular stock. Its results are based on the historical behavior of stock prices (called technical analysis). But value investors always focus on the long-term prospects of stocks. They buy stocks without an immediate sales objective. Long-term stocks are characterized by businesses that show customer focus, branding, great market capture, and above all, high-quality managers running the business. Value investors buy stocks with the goal of holding them forever.

Warren Buffett is a living example among the league of great value investors who follow the above value investing principles to buy businesses and stocks.