So what exactly is this value investing that led Warren Buffett to be so rich?
In Value Investing, you are essentially buying stocks — which essentially is a part ownership in a business — that is worth $1 for 50 cents (this is just an analogy). There are many reasons why you can buy a stock that is worth $1 for 50 cents.
One of the reason is that many stock investors do not understand what they are buying or selling — they simply buy and sell stocks based on hot tips or based on chart patterns.
That forces them (at times) to sell a good stock at a cheap price.
In which, the practitioners of value investing will take advantage of that by buying the stock they sold.
“Value investing in fundamentally different from stocks trading.While the latter focuses more on price movements and other technical indicators, the former focuses on analysing the business behind the stocks and buying the stocks at a cheap price relative to the business value. This is done by first determining the rough intrinsic value of the business.” – Chris Lee Susanto
Value investing works because simply put, the stock market is not efficient.
That means that the stock market at points in time does not accurately reflect the true value of the business behind the stock.