Value Shares

1) Classical value strategy

 

Value strategy is a classical form of investment method derived from the financial analysis of companies. It is based on Benjamin Graham's books  ”Security Analysis“ (1936, with David Dodd) and ”The Intelligent Investor“ (1949).

 

Value investors try to find shares that are undervalued by the market. They attempt to determine a kind of ”fair value“ (or "intrinsic value") for an investment by applying different valuation techniques. If the market value deviates considerably from the fair value, opportunities to buy and sell arise.


A market mechanism that aligns mispriced shares with their actual value is the precondition for successful value investing.

 

In the past, value investing was above all successful when a lack of information about the investment and poor data processing resulted in serious overvaluations and undervaluations on the capital markets. The market mechanism, which adjusted the share price to its fair value, was simply was an improvement of the general information about the security.

 

Due to the broad availability of information about the financial markets and the strict restrictions regarding the use of so-called ”insider information“, this is currently rarely the case. Today, an investor can legally obtain an edge with information advantages only for relatively small and little-known enterprises.

 

At present, undervaluations are mainly caused by the fact that most investors do not trust certain enterprises and their executives. There are several different reasons for this mistrust: the enterprise operates in an unpopular sector or is located in an unpopular country; it may have disappointed investors in the past or the management is underrated. Overvaluations, however, are currently caused above all by excessive trust in an enterprise or unrealistic expectations about the future development of a company.

 

Serious overvaluations and undervaluations are enforced by many investors copying the investment behaviour of other investors and following trends, regardless of how reasonable or questionable these trends are. Value investors position themselves unambiguously against trends, regarding them as unwarranted, even if they are still in force. Therefore, value investors are often referred to as ”contrarian investors”.

 

Nowadays the environment for value investors has become difficult. It is very hard to assess if the process of trust-building starts with an undervalued share, which leads to a higher valuation. Therefore an investor in undervalued shares has to be very patient because he must possibly wait for a very long time until the market recognises the true value of his investment. However, if he is sufficiently patient, value investing can be the key to very good investment success in the long term.

 

2) Dividend strategy

 

A special form of value investing is the so-called dividend strategy. It measures the undervaluation of a share preferentially with one investment criteria - the dividend yield. Shares that have a relatively high dividend in relation to their share price are preferred as investments. Investors whose prime investment objective is to achieve constant payments from their investments and who put less emphasis on capital growth largely choose a dividend strategy.

 

However, the emphasis on dividends alone is problematic from our point of view, because high dividends can also be the expression of basic underlying problems of a company. In particular, very high dividend yields are often reliable warning signals for undesirable trends. Therefore, a successful dividend strategy requires an especially careful risk evaluation.