Thursday, June 15, 2006

Definition: Value investing

After numerous mention of value investing, perhaps it would be appropriate to give a proper definition of value investing on this blog.

Value investing is a broad definition of a style of investment that follow two basic principles:

1) The investment can be bought below its intrinsic value
2) The investment must have a margin of safety

Value stocks are generally characterized by low PER, PBR, high dividend, and typically from mundane industries (not high tech or bio related). Pioneers of value investing include Benjamin Graham, David Dodd and Warren Buffett.


  1. but how do u calculate intrinsic value of a stock?

  2. One quick way to calculate the intrinsic value of a stock is to simply multiply a sustainable EPS by a suitable PER.

    E.g. a sustainable earnings per share (EPS) for Singtel is say $0.30 per share.

    A suitable Price Earnings Ratio (PER) is say 15x.

    So the intrinsic value of Singtel should be $4.50.

    As you can see, both inputs are quite arbitrary, so intrinsic value has to work hand in hand with margin of safety.

    For a more tangible calculation of intrinsic value, we need to do discounted cashflow (DCF) analysis. This is also discussed somewhere in my blog.