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miércoles, 21 de enero de 2015

The Value Investing

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This investment system is widely used by large investors, such as venture capital funds. It is also used by investment banks to value companies in transactions such as mergers, IPO's, etc.

The value investing aim is to determine the quality and quantity of the resources of a company as well as its potential to generate long-term wealth using these resources. It try to assess the company's business, not the future price of its shares on the stock market. Also. the value investing ignore the macroeconomic factors such as GDP, interest rates, etc. We can say that this methodology try to determine the value of the company if someone would launch a takeover bid for it. When 100% of a company is controlled the owner will have many more options compared to a minority investor, such as deciding the redistribution of the assets of the company, merging it with other, divide it into several smaller companies, change the activity of the company etc. The control premium over the market price paid to make a takeover bid is due to these reasons.

However, a small investor can also use this investment style. To do this the investor requires knowledge of the company's business, accounting, law, etc. The goal is to have a investment portfolio comprising high-quality and well-financed companies, bought at a cheap price from the fundamental point of view. Positions normally are kept for many years. The stocks are usually sold in the event that the fundamentals of the company suffer lasting damage, a bid is received for the firm or the company is overvalued, but value investing is better at detecting undervalued to overvalued companies.

Summarizing we can say that value investing is based on buying companies for considerably less money than they are really worth and wait for the market to recognize their real value. To do this we must distinguish perfectly between value and price.

The investor best known worldwide who follow this style of investing is Warren Buffet.

In future articles we will explain the principles of value investing.

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