The roots of value investing date back to the 1930s and it is a price-driven discipline that seeks companies whose shares are selling at a discount to their true, or intrinsic, value.
Investors that are growth-oriented focus on firms whose earnings are growing at a rapid pace which is a quality that makes them highly sought after but for value investors, what they seek are companies that are temporarily out of favor. Their shares may be depressed due to factors ranging from company-specific issues to shifting investor sentiment, poor economic conditions, cyclical trends or an overall market decline. Sometimes they?re being ignored by the market for no good reason.
Over the past 25 years, performance, diversification and risk control are the three factors that have amply made the case for the value style of investing.
Performance. First and foremost, value investing as a strategy has done well over time, rewarding investors with strong risk-adjusted performance. This has actually been true over the past quarter-century.
Additionally, it is important to note that dividends have and continue to be a significant component of the stock market?s total returns ? and particularly those of value stocks.
Diversification. Over time, value and growth stocks have tended to move in different cycles. Tending to outperform value shares and vice versa are growth stocks when they are in favor. That knowledge encourages many investors to construct portfolios employing both value and growth strategies, helping to ensure that they have equity investment with the potential to perform in changing market environments.
More to the point, the value strategy has more than held its own against its growth counterpart. In recent years, the outperformance of value has been particularly pronounced.
Risk control. By their nature, generally tending to be less volatile than their growth counterparts are value stocks. Value firms are better positioned to withstand market declines as well because their shares are typically selling at depressed prices. But normally having higher earning expectations that are built into their prices are shares of growth companies which means that they are subject to wider price swings as those expectations change.
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Source: http://www.thebestfinancialinvestment.com/2011/12/26/why-is-value-investing-essential/
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