Value

Lesson

Value investing is a portfolio management strategy that involves selecting stocks that appear to be trading for less than their intrinsic or book value. Investors who use this strategy believe the market overreacts to good and bad news, resulting in stock price movements that do not correspond with a company's long-term fundamentals. The goal of value investing is to capitalize on these price discrepancies and generate long-term returns.

Practice Question #1

Which of the following best describes value investing?

A) Buying stocks with high growth potential

B) Selecting stocks that appear to be trading for less than their intrinsic value

C) Purchasing stocks that have recently experienced strong price increases

D) Evaluating securities by analyzing historical price and volume data

Select an option above to see an explanation here.

A) This describes growth investing. B) Value investing involves selecting stocks that appear to be trading for less than their intrinsic value. C) This describes momentum investing. D) This describes technical analysis.

Terms

Value investing:: An investment strategy that involves selecting stocks that appear to be trading for less than their intrinsic or book value.
Intrinsic value:: The estimated true value of a company based on its fundamentals and future growth prospects.
Book value:: The net asset value of a company, calculated by subtracting total liabilities from total assets.
Margin of safety:: The difference between a stock's intrinsic value and its market price provides a cushion against potential losses.

Practice Question #2

What is the primary goal of value investing?

A) To capitalize on market overreactions and generate long-term returns

B) To identify and invest in companies with high growth potential

C) To profit from short-term price fluctuations based on technical analysis

D) To follow prevailing market trends and sentiment

Select an option above to see an explanation here.

A) value investing primarily aims to capitalize on market overreactions and generate long-term returns. B) This is the goal of growth investing. C) This is the goal of technical analysis. D) This is the opposite of contrarian investing, often associated with value investing.

Do Not Confuse With

Growth investing:: An investment strategy focusing on companies with high growth potential, often characterized by high P/E and P/B ratios.

Practice Question #3

Which of the following valuation ratios is commonly used in value investing?

A) Price-to-earnings (P/E) ratio

B) Price-to-sales (P/S) ratio

C) Price-to-growth (PEG) ratio

D) Price-to-momentum (P/M) ratio

Select an option above to see an explanation here.

A) The price-to-earnings (P/E) ratio is commonly used in value investing to identify undervalued stocks. B) The price-to-sales (P/S) ratio is commonly used in growth investing. C) The price-to-growth (PEG) ratio is also commonly used in growth investing. D) There is no such thing as a price-to-momentum (P/M) ratio.

Historical Example

During the 1970s, a period of high inflation and economic uncertainty, value investing gained popularity as investors sought out undervalued stocks with strong fundamentals and attractive dividend yields. This approach helped many investors generate significant returns during a challenging market environment.

Practice Question #4

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Example Series 65 Example Practice Question

Real-World Example

An investor who practices value investing might identify a company with a low P/E ratio, a low P/B ratio, and a high dividend yield. They believe that the market has undervalued this stock, and they decide to purchase shares with the expectation that the stock price will eventually reflect the company's true value.