Value investing is an investment paradigm that involves buying securities that appear underpriced by some form of fundamental analysis. The various forms of value investing derive from the investment philosophy first taught by Benjamin Graham and David Dodd at Columbia Business School in 1928, and subsequently developed in their 1934 text Security Analysis.
The early value opportunities identified by Graham and Dodd included stock in public companies trading at discounts to book value or tangible book value, those with high dividend yields, and those having low price-to-earnings multiples, or low price-to-book ratios.
High-profile proponents of value investing, including Berkshire Hathaway chairman Warren Buffett, have argued that the essence of value investing is buying stocks at less than their intrinsic value. The discount of the market price to the intrinsic value is what Benjamin Graham called the “margin of safety”. For the last 25 years, under the influence of Charlie Munger, Buffett expanded the value investing concept with a focus on “finding an outstanding company at a sensible price” rather than generic companies at a bargain price. Hedge fund manager Seth Klarman has described value investing as rooted in a rejection of the efficient-market hypothesis (EMH). While the EMH proposes that securities are accurately priced based on all available data, value investing proposes that some equities are not accurately priced.
The principle behind value investing is purchase stocks when they are undervalued or on sale, and sell them when they reach their true or intrinsic value, or rise above it. Another condition which value investors follow is allowing for a margin of safety when trading in value investing stocks.
Stock prices can change owing to several reasons, underlined by a popularised market tendency which causes a share’s price to waver from its intrinsic value.
For instance, if as per popular market belief Company A will perform extremely well in the future, its share prices might increase from Rs. 100 to Rs. 120, further influencing the market into raising its demand and price dramatically from Rs. 120 to Rs. 180. However, upon inspection and proper analysis, it is found that the company has an average financial and organisational structure which does not withstand such high expectations. Thereby, its intrinsic value is determined at Rs. 80, which means it is overvalued by Rs. 100.
Top value investors refrain from partaking into such market tendencies and ferrets for stocks of companies that have sound long-term fundamentals. Still, due to several contributing factors, their prices are lower than their inherent value.
In other words, value investors seek companies with long-term potential but temporary downtrends in share prices due to market biases. Such investors analyse several parameters and bank on multiple financial metrics to determine which company is performing below its capacity in the market.
Eco-investing or green investing is a form of socially responsible investing where investments are made in companies that support or provide environmentally friendly products and practices. These companies encourage (and often profit from) new technologies that support the transition from carbon dependence to more sustainable alternatives. Green finance is “any structured financial activity that has been created to ensure a better environmental outcome.”
As industries’ environmental impacts become more apparent, green topics have not only taken centre stage in pop-culture, but the financial world as well. In the 1990s, many investors “began to look for those companies that were better than their competitors in terms of managing their environmental impact.” While some investors still focus their funds to avoid only “The most egregious polluters,” the emphasis for many investors has switched to changing “the way money is used,” and using “it in a positive, transformative way to get us from where we are now ultimately to a truly sustainable society.” Investment in companies that are damaging to the environment, and investment into the infrastructure that supports those companies detracts from environmentally sustainable investment.
There are several sectors that fall under the eco-investing umbrella. Renewable energy refers to both solar, wind, tidal current, wave and conventional hydro technology. This includes companies that build solar panels or wind turbines, or the raw materials and services that contribute to these technologies It also refers to Energy Storage companies that develop and use technologies to store large amounts of energy, particularly renewable energies. A good example of this is the fuel cells used in hybrid cars. Also under the renewable energy sector are Biofuels. This group includes companies that use or supply biological resources (like algae, corn or waster wood) to create energy or fuel. Other companies that are included in the renewable energy group are geothermal power companies who use or convert heat to electric energy and hydroelectric companies who harness water energy to make electricity.
Investment into green sectors often involves the development of new technologies that are more environmentally friendly. This comes with high up-front costs that are more difficult to justify to investors.
Green Investing Advantages
- Green investing offers strong potential for long-term growth. According to a 2022 study by Morningstar, a renowned US-based investment research company, there is evidence that investing in green investments can match or beat the profits of more traditional assets.
- Due to its increasing popularity and public attention, green investment can attract a high level of funding from investors.
- There are a wide variety of investment options for green investing, including stocks, bonds, mutual funds, and exchange-traded funds, amongst others.
- Also due to this high demand for green investments, borrowing costs are typically lower than other investment vehicles.
- Many green investments benefit from tax exemptions.
Green Investing Disadvantages
- Although the green investing market has grown considerably in recent years, it is still relatively small compared to other, more developed markets, thus sometimes making it more difficult to enter and exit quickly and easily.
- Because many green investment companies are in the development stage, they can be at higher risk than their more developed counterparts.
- Some companies make an effort to greenwash, which is a rebranding attempt to appear greener investor friendly than they actually are, so it is imperative to do your research before investing.
- There are many interpretations of what constitutes green investing, so ensure that your investment choices meet your needs and expectations.