The Value Approach and Buffett/Graham

trading app

Among the best-known advocates of the value approach are the US investor Warren Buffet and Benjamin Graham. Graham, who died in the 1970s, is considered the founder of fundamental securities analysis, the understanding and appreciation of which is a necessary condition for any value approach.

Graham published his work "Security Analysis" as early as 1934, which is still considered the benchmark for value investors today. Graham is regarded as Warren Buffet's role model. It is no coincidence that he wrote the foreword for the sixth edition of "Security Analysis", which is now in circulation.

Warren Buffet, with his investment company Berkshire Hathaway, is considered an investment legend - but his concepts are based on Graham's thoughts. In recent years, Buffett has acquired countless holdings in what he considers to be fundamentally undervalued companies, thereby making enormous profits. Part of his strategy is also to buy up larger stakes in combination with replacing the management. This approach has been used where Buffett believes mismanagement has been responsible for under-utilisation of a company's resources.

Value means buying fundamentally undervalued stocks

Of crucial importance in any value approach is the ratio of stock market value to book value. Value shares in the narrower sense have a price/book value ratio below 1.00. This means that the company is trading on the market at a lower price than its inventory (the asset side of the balance sheet, often excluding intangible assets) is actually worth.

Why do companies trade below their book value?

What characterises value stocks?

Value stocks are rarely found in "fashionable" sectors and were not, for example, the subject of the New Economy bubble at the turn of the millennium. Very often they are companies from traditional sectors such as mechanical engineering, (heavy) industry, energy supply, infrastructure, construction, food and beverages, chemicals or pharmaceuticals.

Important: A favourable valuation of the shares at the time of purchase is a necessary condition for value investors in The entry is usually made with a medium- to long-term planning horizon, which, however, does not exclude more frequent regroupings. Even if technical analysis is generally not part of the value investment style, it can be used. This is particularly conceivable in markets with strong downward dynamics: despite already favourable valuations, it can make sense to refrain from reaching for a falling knife.

forex chart

Growth shares: Long-term and growth-oriented

Growth investment styles focus on participation in the highest possible growth rates. A typical growth stock has a low or no dividend yield and a high P/E ratio (or no earnings). Analysts expect double-digit annual earnings growth for such stocks. Mostly these are companies from new, dynamic industries or regions/countries - above average often technology companies in the broadest sense. The high growth rates are usually due more to the industry and the environment than to the company itself.

Investments in growth stocks are geared to the long term. Since the value of the portfolio is covered by expected developments in the future, a particularly balanced diversification must take place. In particular, sector clusters should be avoided: Those who primarily bet on internet stocks in the age of the New Economy bubble have lost almost everything. This is no coincidence: Ambitious growth forecasts apply ex post to all successful sectors, but also to overestimated hypes.