INVESTMENTS & PENSIONS
Using valuation as a means of identifying investment opportunities is a long-standing and proven approach . However , in the last decade , it has come under scrutiny regarding whether this approach still holds up in the modern investment world .
HISTORY AND BACKGROUND
Benjamin Graham , known as the ‘ father of value investing ’, developed a philosophy that emphasizes the importance of investing in undervalued assets and focusing on a company ’ s intrinsic value .
Graham ' s philosophy , known as value investing , centres on purchasing assets trading below their intrinsic value . He stressed the importance of conducting thorough analysis and research to identify undervalued assets with strong fundamentals .
Key points of Graham ' s philosophy :
• Margin of safety . Graham popularized the concept of the margin of safety , which means purchasing shares at a price significantly below their intrinsic value . This provides a buffer against unforeseen events and decreases the risk of permanent loss of capital .
• Contrarianism . Value investors often go against market sentiment by buying stocks that are out of favour or overlooked by the majority of investors . Graham believed that market fluctuations provide opportunities for investors to capitalize on mispriced securities .
• Long-term perspective . Value investing is inherently a long-term strategy . He advised investors to have patience and discipline , and not be swayed by shortterm market trends or emotions .
• Diversification . Graham recommended diversifying investments across different asset classes to reduce risk and protect against market volatility . By spreading investments across a variety of securities , investors can minimize the impact of individual stock fluctuations on their overall portfolio .
Overall , his philosophy highlighted the importance of thorough analysis , discipline , and a long-term perspective in building a successful investment portfolio . on the fundamental value of an investment , investors can better assess the risk and potential return of their portfolio .
One of the key benefits of a valuation-driven approach is that it helps investors avoid overpaying for assets during periods of market exuberance ( e . g . the ‘ Magnificent 7 ’ in today ' s market ). By conducting a thorough analysis of an asset ' s financials , market position , and growth prospects , investors can determine whether the current market price accurately reflects the true value of the investment .
This approach enables investors to identify opportunities where assets are undervalued by the market but have strong fundamentals that suggest long-term growth potential . By selecting undervalued assets , investors can potentially benefit from capital appreciation as the market corrects itself and recognises the true value of the investment . In recent years , Japan ’ s market has exemplified the successful application of this theory , with some feeling that the UK market could present similar opportunities .
CONSIDERING RISK
A valuation-driven approach can potentially help investors mitigate risk by avoiding investments that are overvalued or have unsustainable growth projections . By conducting rigorous due diligence and analysis , investors can identify warning signs of potential market bubbles or speculative investments that may lead to significant losses in the future .
Overall , incorporating investments aligned with this philosophy could prove to be an essential component in building a resilient , sustainable and well diversified longterm portfolio .
RELEVANT FOR TODAY
A valuation-driven philosophy remains essential for investors seeking to make well-informed decisions based on an asset ’ s intrinsic value rather than relying solely on market trends or sentiments . By focusing
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