Value investing

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Value Investing (including value-based creation ) is an investment strategy or an investment style, in the purchase and sale decisions for securities primarily with reference to the real economic equivalent of the plants, the so-called intrinsic value (Engl. Intrinsic value) are taken. This means that buying and selling decisions regarding shares are based on the ratio of the current price to value, i.e. the price / value ratio. The investment approach is therefore part of fundamental analysis . This is how value investing differs fundamentally from investment strategies that are based on technical analysis and momentum and therefore mostly onlylook atthe previous development of the market price (course) of the investment over time or are simply based on the news situation ( noise trading ) . Empirical studies show that with so-called style investments, such as value investing, risk-adjusted excess returnscan be achievedcompared to a market index (e.g. the DAX ). When assessing a special value investing strategy,whatis interesting for an investor is its implication for the stock return and the risk (e.g. the volatility of the return ).

history

The American economist and investor Benjamin Graham (1894–1976), who together with David Dodd published the book Security Analysis in 1934 , which is still considered the standard work of value investing today, is considered the founder and father of value investing . An important concept of the book is the so-called margin of safety , which represents the difference between the intrinsic value (also called intrinsic or fair value) of a security and its market price . This safety margin serves to limit the risk and preserve the investor's capital. That is why a value investor is only prepared to pay less for a security than its intrinsic value , because this results in a positive safety margin. The greater the safety margin, the lower the risk for the investor . While the market value results from supply and demand , the intrinsic value is determined with the help of fundamental analysis.

This fundamental thesis of value investing has become increasingly popular through investors like Warren Buffett and Peter Lynch and the books written by or about them. In the course of time, additional qualitative factors were taken into account when determining the fair company value.

These include, for example, the robustness of the business model, the quality of management and possible competitive advantages for the company. The evaluation of the qualitative factors is based on subjective assessments of the investors. This inclusion of quality is justified in quality investing .

Approach and differentiation from other investment strategies

Value investing looks for individual securities that are undervalued. This process is also known as stock picking in the case of stocks . To do this, one tries to determine the intrinsic value of the securities under consideration with the help of fundamental analysis. When making investment decisions, value investing takes advantage of time-limited inefficiencies in the financial markets when it comes to pricing by purposefully buying securities at prices that are too low compared to the intrinsic value of the security (share value / intrinsic value <1). Value investing assumes an imperfect capital market as a basis. With perfect capital markets , value investing would not be possible because the price (P ) would correspond to the intrinsic value (W) at any point in time . This would result in the price-to-value ratio (P / W) being equal to 1 at any point in time and therefore no decision could be made as to which stocks are valued below the intrinsic value of the company and value investing would be invalid. In the traditional value investing only simple valuation metrics are often viewed and shares after KGV or KBV evaluated. However, such valuation ratios are often insufficient estimates of the relationship between market price and intrinsic value , so that a well-founded determination of the value makes sense. For this, however, you need evaluation methods that are not based on the CAPM hypothesis , since the underlying assumptions would lead to P / W = 1 anyway.

The excess return of undervalued companies (with P / W <1) can be roughly explained by the following aspects:

  1. Reduction of undervaluation over time
  2. Above-average performance over time due to the strength of the company; this can simplistically follow from the ignorance of growth
  3. Above average dividend yield
  4. A low probability of bankruptcy and the associated interruption of the payment flow

The above-average performance of undervalued companies occurs particularly in phases in which the market as a whole shows a decline in prices.

In summary, value investing is defined as buying a stock for less than its intrinsic value . Depending on which method is used to determine the value, the calculated intrinsic value deviates more or less from the current share price .

Expansion of value investing

Since the beginning of the 1980s, empirical capital market research has uncovered anomalies that influence the return on stocks. These can not be explained by the CAPM . For example, a study by Basu revealed that stocks with a low P / E ratio , as claimed in value investing theory, lead to above-average returns that cannot be explained by the CAPM. Nevertheless, a low P / E ratio can be justified by an above-average earnings risk and / or an above-average probability of insolvency . In this case this assumption would reduce the value. Based on this, further developments of value investing are necessary. There are three main starting points for this:

  1. Instead of simple valuation metrics such as price-earnings ratio and KBV , the price-value ratio (P / W) should be given immediately.
  2. The determination of the value W should not be based on financial-theoretical valuation methods which are based on the hypothesis of perfect markets and which imply a P / W = 1.
  3. Value investing approaches, valuation methods and risk factor models should be linked in order to show the relative importance of the value factors in the declaration of returns and to be able to identify indications for the value drivers that have so far been neglected (e.g. income volatility and probability of insolvency ).

One possible approach for the further development of value investing would be, for example, a direct calculation of the P / W ratio without having to fall back on financial-theoretical valuation methods that implicitly assume P / W = 1. A risk-adjusted earnings value of a company is calculated by deriving the discount rate on the basis of the earnings risk instead of fluctuations in stock returns and taking into account the probability of insolvency , which has an approximate effect of a negative growth rate. Then stocks of companies are selected whose risk-adjusted fundamental value W is particularly well above the current stock market price P. The derivation of the necessary evaluation equation is based on a risk-value model. The inclusion of the insolvency risk can significantly increase the quality of the assessment and significantly reduce serious errors in the company assessment, as fundamental errors are made less likely.

In addition, Fama and French have presented a three- and five-factor model , respectively , with which the excess returns of value stocks can be explained in the context of the market efficiency hypothesis . For the US stock market, the three-factor model can explain more than 90% of the variance in portfolio return between two diversified portfolios. The excess return of Warren Buffett's Berkshire Hathaway compared to a market-neutral portfolio could be explained by the consistent implementation of the value and quality factors.

See also

literature

  • Benjamin Graham, David L. Dodd: Security Analysis. Principles and technique . McGraw-Hill, New York 2008, ISBN 978-0-07-159253-6 (first edition: 1934).
  • Seth A. Klarman: Margin of Safety. Risk-averse value investing strategies for the thoughtful investor . Harper Business, New York 1991, ISBN 0-88730-510-5 .
  • Mary Buffett, David Clark: Buffettology . Ueberreuter, Vienna 1998, ISBN 3-7064-0472-9 .
  • Bruce CN Greenwald: Value investing. From Graham to Buffett and beyond . Wiley, New York 2001, ISBN 0-471-38198-5 .
  • Benjamin Graham: The Intelligent Investor . Harper Business, New York 2003, ISBN 0-06-055566-1 (first edition: 1949).
  • Warren Buffett, Lawrence A. Cunningham: Essays by Warren Buffett. The book for investors and entrepreneurs . FinanzBook Verlag, Munich 2012, ISBN 978-3-89879-697-2 .

Web links

Individual evidence

  1. ↑ E. Dimson, P. Marsh, M. Staunton: Triumph of the optimists: 101 years of global investment returns . Princeton Univ. Press, 2002, ISBN 0-691-09194-3 .
  2. ^ B. Graham, DL Dodd: Security Analysis . 1934.
  3. ^ Warren Buffett: Essays by Warren Buffett . 2003.
  4. ^ Peter Lynch: One Up on Wall Street: How To Use What You Already Know To Make Money In The Market . 2000.
  5. ↑ Werner Gleißner: Value Investing: Status Quo and Perspectives . In: Corporate finance . March 2017, p. 103-116 .
  6. ↑ C. Walkshäusl: Fundamental Risks and Stock Returns: Here too, less risk means better performance . In: Corporate finance . April 2013, p. 119-123 .
  7. ^ Basu: The Journal of Finance . Ed .: The Journal of Finance. 1977, p. 663 .
  8. ↑ Werner Gleißner: Value Investing: Status Quo and Perspectives . 2017.
  9. ↑ Petersen / Zwirner / Brösel: Handbook Company Valuation . In: Handbook Company Valuation . 2013.
  10. ^ Spremann: Valuation: Basics of modern company valuation . 2004.
  11. ↑ Werner Gleißner: The insolvency risk influences the company value: A clarification in 10 points. (PDF) 2017, accessed on August 3, 2017 .
  12. ^ Eugene F. Fama, Kenneth R. French: The Cross-Section of Expected Stock Returns . In: The Journal of Finance . tape 47 , no. 2 , June 1992, pp. 427-465 , doi : 10.1111 / j.1540-6261.1992.tb04398.x ( wiley.com [accessed July 4, 2020]).
  13. ^ Eugene F. Fama, Kenneth R. French: A five-factor asset pricing model . In: Journal of Financial Economics . tape 116 , no. 1 , April 1, 2015, ISSN  0304-405X , p. 1–22 , doi : 10.1016 / j.jfineco.2014.10.010 ( sciencedirect.com [accessed July 4, 2020]).
  14. ↑ Andrea Frazzini, David Kabiller, Lasse Heje Pedersen: Buffett's Alpha . ID 3197185. Social Science Research Network, Rochester, NY January 9, 2019, doi : 10.2139 / ssrn.3197185 ( ssrn.com [accessed July 4, 2020]).