Warren Buffett, arguably the most famous investor on the planet, has a net worth of around $83 billion. He is frequently described as a value investor. What does that mean? And can anyone be a value investor?
Yes, nearly anyone can be a value investor in that the concept is easy to grasp. This investment strategy is a way of approaching investing like sifting through a pile of clothes in a bargain basement or scouring for coupons.
Value investors look for diamonds in the rough: investments or companies that are undervalued and have significant opportunity to grow and appreciate. Its principles were developed by Buffett's mentor, his one-time Columbia University professor Benjamin Graham.
Value investing is a type of fundamental investing, meaning that it uses straightforward, publicly accessible company data like its market capitalization, profits and losses, and anything else you might quickly glean from a company's financial statements. Value investors often look for low ratios for the stock prices relative to the company's book value, its earnings (price to earnings ratio), and its revenues.
Video by Stephen Parkhurst
Let's look at Berkshire Hathaway, the Omaha, Nebraska-based $500 billion company of which Buffett is chairman and chief executive. It had much humbler beginnings.
The company has roots going back to the 19th century, when it started as a Rhode Island-based textile company going by the name of the Valley Falls Company. Several mergers and decades later, it became Berkshire Hathaway.
The company began to have financial problems, partly because of changing trends in the textile industry as a whole. That's when Buffett decided it was time to strike. He started his acquisition of Berkshire Hathaway in 1962, began adding insurance companies to his holdings (including GEICO), and the rest is history. Although he told CNBC in October 2010 that buying Berkshire Hathaway was his "biggest mistake ever," he meant that if he had gotten into insurance earlier, the company would be worth $400 billion instead of a mere (at the time) $200 billion.
Buffett continued to use this model: Find an undervalued stock, take the leap of faith of buying it, and hold on to it for the long term. Today, Buffett is the world's seventh-wealthiest person, and investors eagerly track and mimic his investments.
Maybe you're not in a position to buy entire companies like Buffett, but you can do the next best thing: Invest in stocks.
Video by Stephen Parkhurst
At first blush, it might appear as if value investing is just common sense: Buy stocks at low share prices, and sell high. But if it were as simple as that, nearly everyone playing the stock market would be rich.
There are two major aspects of value investing that are easy in theory, hard in practice: knowing how to find and judge a bargain, and holding on to the investment and riding through volatility.
Warren Buffett advises choosing an array of stocks, via index funds, ETFs, or mutual funds, based on long-term value.
The other challenge is remembering you're looking long term and need to resist the urge to sell at the slightest sign of a price drop. As Buffett told "Squawk Box" in October 2014, "Now if [investors] think they can dance in and out [of the market] and buy and sell stocks, they ought to head for Las Vegas. I mean, they can't do that. ... But what they can do is determine that there's a number of solid American businesses, a great number of them, and if you own a cross section of them and particularly if you buy them over time, you basically can't lose."
More from Grow: