What is value investing?

Value investing is the allocation of capital to those companies that "create value" for shareholders and whose value can be measured with a high degree of integrity.

Value investing is the allocation of capital to those companies that "create value" for shareholders. Also known as intrinsic value investing; Value investing emphasizes the valuation of individual companies and seeks long-term total return on invested capital. Value investing is one of the valuation methods based on the discounted cash flow of free cash flow to stock holders and expected dividends to estimate the absolute intrinsic economic value of a company. In other words, Intrinsic Value or Economic Value; It is the discounted value of the cash that can be taken out of a business during the company remaining life. The calculation of intrinsic value is very subjective due to it is sensitive to interest rates and estimation of future cash flows, So, the intrinsic value of a company is an estimation instead of a precise figure. Intrinsic economic value of a company also know as "investment value" , "indicated value", "central value", "normal value", "reasonable value", "fair value", or "appraised value".

Value is a misleading term, there are various value such as market value, accounting value (or book value or net worth), economic value (or intrinsic value). Market value or capitalization of a company is calculate using the stock price multiplied by the number of shares outstanding.

Price is not equivalent to value. Pricing and stock screening method in fundamental analysis and technical analysis is not valuation. Pricing models such as conventional academic capital asset pricing model (CAPM) using beta coefficient is measurement of investment risk but not valid in valuation model.

The methods of appraising intrinsic economic value is to selecting an appropriate discount rate and forecasts the future cash flows to calculate how much the cash returns from it internal business, this process is independent from the current market price this is why the adjective "intrinsic" is using.