Value Investing: Bridging Theory and Practice

Abstract

Value investing refers to the buying or selling of stocks on the basis of a perceived gap between their current market price and their fundamental value – commonly defined as the present value of the expected future payoffs to shareholders. This style of investing is predicated upon two observations about publicly listed companies and their stock prices: (1) a share of stock is merely a fractional claim on the futures cash flows of an operating business, and that claim is the basis of its long-run value; (2) over shorter horizons, prices can deviate substantially from the long-run value of the stock. Value investors buy stocks that appear to be cheap relative to their intrinsic value and sell (even sell short) stocks that seem expensive.