The Great Depression of 1929-1933 marked the beginning of “value investing,” a popular investment strategy today. Benjamin Graham and David Dodd wrote a classic book called Security Analysis in 1934, which outlined various investment strategies, including purchasing stocks with low prices relative to asset value, low price by earnings, and observing insider purchases. In this article, we will explore each of these strategies in detail.
Firstly, buying stocks with a low price in relation to asset value involves measuring asset value in two ways – book value and market value. Book value refers to the value at which the asset was booked into the accounts, while market value is the value of all outstanding shares. Successful firms typically have a market value greater than their book value, while low price-to-book ratio stocks historically earn higher returns than the rest of the market.
Secondly, investing in low price by earnings stocks can provide higher earnings yields than those bought at higher price-to-earnings ratios. A low price-to-earnings ratio may indicate a bargain if a company’s profits are expected to improve, but may also be a sign of bankruptcy.
Lastly, observing purchases by insiders, such as officers, directors, and shareholders, can provide insight into a company’s future. If insiders, particularly management, are buying a company’s shares, it may indicate confidence in its future. However, insider trading regulations must be followed to avoid illegal activity.
In conclusion, value investing is not a new concept, but the approach and analysis undertaken to determine what investments may yield value have evolved. By utilizing these investment strategies, investors can potentially earn higher returns on their investments.