Defining Value Investing
- Roughly, a value investor looks for stocks they believe are undervalued based on their current worth
- Implying, a value investor seeks businesses trading at a share price that's currently considered a bargain
- They believe the market will eventually recognize the company's value, and the price will rise as time goes on
Describing Properties of Value Stocks
- Typically, the stock price of a value stock is low relative to their profits
- Also, they are considered to be less risky (compared to growth stocks)
- Since, they already have a proven ability to generate profits based on a proven business model
- Essentially, the essence of value investing is buying discounted stocks that are priced less than their current value
- This discount of the market price relative to a stock's actual value is called the margin of safety
- In other words, the margin of safety refers to the discount of the stock
Defining Margin of Safety
- Margin of safety (or MoS) is how far below the true value one is paying for a stock
- In layman's terms, it is the deal you get for a stock
- Roughly, stocks with a low P/E ratio are a good indicator that a stock has a high margin of safety
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A high margin of safety protects the investor from the following:
- Poor future decisions
- Unexpected downturns in the market
References
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