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SCREENING : An easy and efficient screening tool to find Value Stocks
with Benjamin Graham's Value Methodology
Value investing is :
- buying, with a sufficient margin of safety, a part of capital
of a company whose market price is below the company's "real"
value, or "intrinsic value".
- selling the stock when the market price reaches the intrinsic
value.
The theory of ‘value investing’ was invented by Benjamin Graham
as early as 1934 and is based on the assumption that two values
are attached to all companies. The first is the market price – the
value of the company on the stock exchange. The second is a company’s
business value.
All companies have an intrinsic value or business value, which is
based on its ‘real time’ value in the event of a merger with a competitor
or in a takeover situation. Alternatively the owners may consider
the business value as the amount that could be achieved by breaking
up the company and selling all its assets.
In the long term, stock prices will reflect this business value,
but in the short and medium term, market prices are often far above
or below it. Value investing seeks to make the most out of this
disparity.
Finally, investments should only be made when the
market price is considerably lower than the business value – a minimum
of 40% to 50% below. This difference between the market value and
the business value is called the ‘margin of safety’.
A wide margin of safety secures the investments
against a permanent loss of capital – even though short-term adverse
market movements may occur.
The stocks should be sold when the market price
gets close to the business value.
Consequently, value investors must demonstrate patience
when growth stocks are most popular among investors. History has
shown that value stocks and growth stocks alternately lead the performance
statistics.
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