Behavioral finance FAQ / Glossary (Value investing)
This is a separate page of the V-Z section of the Glossary
Dates of related message(s) in the
Behavioral-Finance group (*):
Year/month, d: developed / discussed,
Value investing / value stock
00/10i - 01/6i 02/10i, 12i -
03/4i,7i,9i - 08/6d + see fair
price, value, fundamental analysis,
p/e effect, profile + stock types
Choosing nice and cheap stuffs ...hopefully!
Value investing aims at picking "bargain" stocks (called thus "value stocks")
which current market prices are considered well below a conservatively
Observed value or expected value?
Betting on the horse's good look?
Or on the other gamblers?
Value investors, who chase bargain opportunities to fill their
shopping bag,usually take as criteria of value:
The fundamentals (*)
compared to prices
(*) current earnings, asset values and other corporate and economic
data (see fundamental analysis).
The idea is that
Already known fundamentals, if they look strong and healthy, would
give a guarantee of good management.
A favorable comparison between those fundamentals and the market
prices would signal a buying opportunity.
This "price" benchmark is the usual difference between
value investing and "growth" investing.
Growth investing take fundamentals into account only if they show
fast growth, wondering less about other value criteria and possible
Value investors are sometime confused with contrarians
(see that word).
This is not so clear cut as there are:
Similarities: contrarians buy neglected, therefore usually
cheap stocks, although not all neglected stocks can be
valued as cheap,
But also differences: contrarians tend to operate against
the trend, value investors are more focused on fundamentals
than on trends.
Select with care the "value stocks"
What seems cheap might be
either a neglected gem, or valueless.
What can make them become more glamorous?
Stocks with low P/E, P/B (see those acronyms), price/sales ratio and/or
high dividend return, are usually considered value stocks.
Some studies have shown that they tend to outperform the
market in the long term, although nothing guarantees this to be
a repetitive phenomenon.
Some have shown also that often, after several years when
investors privileged momentum stocks / growth stocks, up to
the point that they got highly overvalued, their interest tends
to shift towards value stocks, which have been depressed for
But is cheapness enough?
Even if there is truth in all this, should we consider as cheap all
underperforming stocks with attractive ratios?
Should we fill our shopping bag or piggy bank with them
That might be naive! Even "cheap" stocks that seem sound must
be scrutinized carefully.
If their cheapness is due to a bear market, better have in mind that nobody
knows when a downtrend will revert.
So better be selective and avoid "value traps" (see that phrase).
Also, let us remember that the two approaches, value or growth, might be
combined into a "GARP - growth at a reasonable price" strategy.
Eeasy to say, but less easy to find the GARP candidates on a stock list,
but it is worth a try!
Analyze, analyze, analyze ,
before deciding that an unloved or neglected stock is actually
a rare gem and a real bargain that offers good
potential value at a low price!
Also, to help make your valuations, look at the
l stock types and their image coefficients,
as shown in this glossary, and in this site in general!
An extreme sport: vulture investing
Who knows if the prey can be eaten safely?
As seen in the loss aversion article, there is an illusion in thinking that all
distressed stocks (*) and fallen angels will take off again soon.
Many of them lack the right fundamentals and aptitudes to recover
and some are on the way to the cemetery.
Better leave vulture investing, a high risk business, to those with the
money, the nerves, the information and the acumen!
(*) Anyway a distressed stock does not systematically have a low P/E,
as its earnings might have fallen even faster than its price.
See value investing,
profile (stock type)
See value investing
A value trap is a stock which price fell so much that it seems cheap (like a
value stock) but which is still overpriced compared to its fundamental value.
(*) To find those messages: reach that BF group and, once there,
1) click "messages", 2) enter your query in "search archives".
Members of the Behavioral Finance Group,
please vote on the glossary quality at BF polls