Value Investing – Systematically Finding Undervalued Stocks

What Is Value Investing?

Value investing is an investment strategy in which buy and sell decisions for securities are made exclusively with reference to their real economic equivalent value, the so-called intrinsic value.

The goal is to keep the risk of loss as low as possible based on solid metrics and to beat the overall market over the long term. The approach was founded by Benjamin Graham (The Intelligent Investor, 1949). His most famous student is Warren Buffett, who expanded the concept with quality factors – with extraordinary long-term success.

Investors – Stock Picking

Value investors are always on the lookout for undervalued securities. This behavior is also referred to in the stock market as stock picking. In doing so, value investors try to determine the fair value of the analyzed stocks using fundamental analysis.

In their investment decisions, value investors specifically exploit time-limited inefficiencies in stock market price formation by buying selected securities at prices that are too low relative to the stock's fair value. This difference between fair value and market price is also referred to as the margin of safety. It serves, in a sense, as a safety margin for value investors and to limit the risk of loss.

After acquiring a security, value investors wait for the undervaluation to gradually be reduced through rising prices, and in the best case even for overvaluation to arise through renewed inefficiencies. It is important here to constantly check whether market price and intrinsic value change over time, in order to take appropriate action if necessary.

Key Ratios in Value Investing

In fundamental analysis, companies are compared based on individual financial ratios and ratios formed from two different financial metrics. The required data is taken from annual or quarterly reports. Ratios of the stock price and individual financial metrics are also frequently formed.

10 Important Ground Rules for Investors

1. NEVER buy stocks on credit!
2. No additional purchases after significant price increases!
3. No sales after significant price losses!
4. Only invest in companies with understandable business models!
5. No future forecasts based solely on the past!
6. Diversification! (spread risk across multiple companies)
7. Consider a company's long-term prospects!
8. Assess a company's management!
9. Analyze a company's financial strength!
10. Pay attention to dividend payments!

How Does Finanzoo Support Compliance With These Rules?

No one can see into the future. Psychologically, people always look for patterns – for example, chart analysis. In the best case, these patterns hold for a few years, but they are never universally valid.

"The only thing you can be sure of when forecasting future stock earnings is that you probably were wrong in your forecast." — Benjamin Graham, The Intelligent Investor, 5th edition 2011, p. 103

Finanzoo therefore provides the fundamental data of the past compressed in the Finanzoo F-Score as a basis for future investment decisions. This systematically and traceably takes into account rules 2, 3, 7, 8, 9, and 10.

The final decision to buy or sell a stock is, of course, always made by the informed investor.

Finanzoo Supports Value Investors

Finanzoo supports value investors in all these necessary steps. First, in the selection of suitable stocks based on the fundamental evaluation of balance sheets to determine fair value.

Following an investment decision, additionally in monitoring the portfolio with regard to price development compared to fair value.

Discounted cash flow, earnings value, asset value, or liquidation value can serve as a benchmark for a stock's fair value. Finanzoo also calculates the Graham factor (P/E × P/B). If it is below 22.5 (Graham's reference value), this indicates a classically cheap valuation. This factor feeds into the F-Score algorithm.