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What is value investing? investing explained

INVESTING EXPLAINED: What you need to know about value investing and finding stocks on offer

In this series, we break down the jargon and explain a popular investment term or topic. Here is the investment in value.

What’s that?

This style of investment is based on the search for shares whose price does not seem to reflect the fundamental value of the company, either based on its sales and profits, or the dividends it pays.

Such a stock will often have a high dividend yield or a low PE (price to earnings) ratio. US investors are particularly looking for a low P/E (book price) ratio, that is, the market capitalization of the company relative to the value of its assets.

Some value investing enthusiasts look for ‘deep value’ stocks that are priced at about a third below the asset’s value. Skeptics, however, argue that they are usually cheap for a very good reason.

Take the pulse: The rotation into value began in earnest earlier this year, with investors moving into previously unloved sectors.

Take the pulse: The rotation into value began in earnest earlier this year, with investors moving into previously unloved sectors.

Why is it in the news so much?

Due to the decline of the love affair with growth investing, which was the dominant style in the United States and the United Kingdom until the end of last year.

Growth stocks are seen as reassuringly expensive as they seem to promise above-average future appreciation; they tend to have high PE ratios and often pay little in the way of dividends.

U.S. technology stocks are the highest-profile growth stocks, but have recently fallen out of favor, thanks to rising interest rates.

The key appeal of these stocks lies in their future earnings. But these gains seem less attractive when investors feel higher interest rates could produce superior returns today. Such has been the fall of some technology stocks that some now, paradoxically, consider them to be of ‘deep value’.

Is value investing back in fashion?

The rotation to value began in earnest earlier this year, as investors moved into previously unloved sectors like banking and energy, fueled by anxiety over rising interest rates and the inflation.

This change suggests a widespread conviction that courage is the way forward. But some remain unconvinced of this strategy.

Terry Smith, chief executive of Fundsmith, arguably Britain’s most controversial fund manager, argues that “good sectors and businesses are still good, and low-performing businesses are also persistently low-performing.” This argument will continue.

Some famous value investor?

The biggest players are Americans. They include Warren Buffett, the 91-year-old who runs Berkshire Hathaway, the US mega-fund. He is supported in this doctrine by his partner, Charlie Munger, 98 years old.

Bill Ackman, head of Pershing Square Capital Management, is primarily known as an activist, but he is also a value investor.

UK names are less famous, with Alex Wright and Jonathan Winton, the co-directors of the Fidelity special Values ​​among the most prominent.

Is growth, or value, better?

In 2021, growth and high growth generated total returns of 17.5% and 17.7%, respectively. This compares to 18.6 percent and 20.8 percent for value and deep value.

So great have been the declines in growth stocks this year that growth and high-growth returns have been negative: -10.9 percent and -23.1 percent, respectively.

Value and deep value returns have been 2.1 percent and 5.6 percent. These figures, calculated by Waverton Investment Management, are based on the MSCI AC World Index.


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