Value investing is a type of investment strategy that encourages investors to purchase assets they believe are undervalued and later sell them at a profit once the market “corrects” the value of the assets.
The founding fathers of value investing, Benjamin Graham and David Dodd, two Columbia Business School professors, first taught the principles of value investing in 1928. Though Graham and Dodd never actually used the term “value investing,” the term was coined after the release of their 1934 text Security Analysis, which covers the basic principles.
- Is value investing right for you?
- Characteristics of a great value investing book
- The best value investing books to read
- 2. The Intelligent Investor by Benjamin Graham
- 3. Financial Statements: Step-by-Step Guide to Understanding and Creating Financial Reports by Thomas R. Ittelson
- 4. The Warren Buffett Way by Robert G. Hagstrom
- 4. F Wall Street by Joe Ponzio
- 5. Value Investing and Behavioral Finance by Parag Parikh
- Final thoughts
Is value investing right for you?
The value investing method hasn’t existed without criticism. An issue arises when investors who have not gained a solid understanding of market conditions attempt to speculate without keeping current market trends in mind.
For example, if the economy of the United States is trending downward in a bear market, purchasing undervalued stocks may not be effective because the value may still decrease alongside the overall influence of the economy. On the opposite end of the spectrum, stocks may become artificially overvalued in a bull market yet still increase in value over time thanks to the influence of the market’s conditions.
Value investing is best used by investors who firmly understand economic conditions. If you’re interested in learning more about bull and bear markets and economic trends, check out Benzinga’s market news feed.
Characteristics of a great value investing book
Not every book on value investing is useful or informative. Keep an eye out for:
A solid and defined analysis strategy
The cornerstone of value investing is purchasing assets when they are undervalued, but how can you determine what will rise in value and what will stagnate? Value investing has proven to be a reliable investment strategy. Unless you understand how to appreciate an asset, no amount of text will help you grow your money. The best value investing books offer a few chapters on understanding what makes an asset valuable and a clear criteria for determining whether or not you should buy.
While it’s important to read books directly from value investing professionals, too much “fluff,” or filler, may indicate that the author just tried to fill space. Authors that spend too much time talking about themselves, their portfolios (without an explanation of the indicators that allowed them to reach their status), or their careers typically offer little in the way of education.
A skill level that you can comprehend
Some texts on value investing will rely more heavily on the use of formulas and calculations to determine which assets are over or undervalued. If your experience crunching numbers ended after that general education course you took in college, you may have difficulty understanding some of the most complicated texts on value investing.
Don’t let this discourage you—there are a number of authors who have written their books with novice investors in mind. If you find yourself re-reading a text multiple times and still not absorbing the information on the page, moving on to a different author or title can help you save both time and frustration.
The best value investing books to read
Are you still new to the world of investing? Do you need entry-level advice on how to invest effectively without the technical jargon? If you said “yes” to either one of these questions, The Little Book of Value Investing is a great place to start your trading education. Author Christopher Browne rose to prominence through his career at Tweedy, Browne Company, a brokerage firm hailed by Buffett and Graham.
Written in 2006 with the absolute beginner in mind, Browne uses a grocery store shopping analogy to help new investors understand how to value assets. Browne argues that in a grocery store, there are typically two types of major products for sale: well-packed name-brand goods (that come with a high price tag) and products that work just as well but are “undervalued” because they’re sold at a discount. The value investor learns to look for “sale” patterns and buy goods that are offered below their market value.
The Little Book of Value Investing is a short read that covers the most important concepts, including stock diversification, margin of safety, the difference between value and growth and formulating a sustainable pattern of buying and selling.
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2. The Intelligent Investor by Benjamin Graham
After you’ve mastered the concepts introduced in The Little Book of Value Investing, it’s time to move onto the text that’s largely considered to be the magnum opus of the value investing world, Benjamin Graham’s The Intelligent Investor. Penned by one of the founding fathers of value investing and the mentor of billionaire investor Warren Buffett, The Intelligent Investor offers over 600 pages of information on investing and speculation, the importance of a margin of safety, and the fictitious “Mr. Market,” a personification of the “manic-depressive” volatile stock market.
Considered by many to be one of the most important books on finance ever written, The Intelligent Investor offers time-tested investing information—a must read for any value investor.
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3. Financial Statements: Step-by-Step Guide to Understanding and Creating Financial Reports by Thomas R. Ittelson
Gotten a firm grasp on value investing’s core principles? It’s time to move on to more complicated types of numerical analysis. As its name suggests, Financial Statements is all about teaching investors how to value assets using financial information and data. Financial Statements also about accounting, but don’t let that put you off—the information contained in the book is invaluable for investors who are looking for a data-backed method for valuing assets.
Easy-to-follow and written in a way that even those who have never taken a course on accounting can understand, Financial Statements offers a crash-course in the practical principles of accounting so value investors can make smart evaluations.
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4. The Warren Buffett Way by Robert G. Hagstrom
With a net worth of over $86 billion, Warren Buffett is one of the world’s most prominent investing success stories—and he’s an outspoken advocate of the principles of value investing.
The book begins with an introduction to Buffett’s early life, his first investment at age 11 and the lessons he’s learned both from his own missteps and the instruction he received from his education at Columbia Business School. The Warren Buffett Way is much more than a biography on Buffett’s life—it also covers the principles of value investing that Buffett has used to build his billion-dollar empire and offers advice and tips for how lower-level investors can apply his strategies within their own portfolios.
Perfect for both novice value investors and Warren Buffett fans, The Warren Buffett Way uses Buffett’s success story as a vehicle for value investing education.
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4. F Wall Street by Joe Ponzio
Readers looking for a more casual value investing read can check out F Wall Street: Joe Ponzio’s No-Nonsense Approach to Value Investing For the Rest of Us for a more digestible explanation of the most important value investing principles. Like The Warren Buffett Way, F Wall Street uses Warren Buffett’s portfolio and investment advice as a guiding resource to teach the basics of value investing, but does so with a more casual tone that’s as fun to read as it is educational.
The author breaks down the technical jargon that puts off many new investors and simplifies the concept of value investing through simple examples. If you’ve found yourself frustrated at dry investing texts in the past, F Wall Street offers a breath of fresh air—and important information to boot.
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5. Value Investing and Behavioral Finance by Parag Parikh
One of the biggest factors that influences an investor’s decisions are emotions. The fear of missing out on an asset that seems to be rising in value can cause us to invest at inopportune times and ignore undervalued competing assets. Value Investing and Behavioral Finance offers investors a frank look at how our emotions influence financial decisions and helps make investors more aware of their own biases.
Though the book is based around investors looking to enter the Indian stock exchange, Parikh does a great job of applying behavior analysis across borders. American investors can easily use the universal principles of psychology laid out by Parikh to examine their own trading strategies and formulate a plan to remove emotion and the most common financial fallacies from their investment strategies.
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In a global market that’s constantly changing, it can be easy to get swept up in the latest and greatest trading strategy or advice from the “financial guru” du jour. Maintaining a solid grasp on the principles of investing can help you stay grounded when choosing where to invest.
Looking to brush up on basic economics? Check out Benzinga’s list of the best online investing courses that you can take from the comfort of your living room.