Value

Investing in value assets represents an investing strategy, which involves buying an asset that appears to be trading at a lower price than its fundamental or book value. The aim of such an act is to make a profit on the assets’ reversion and reaching of fundamental value in the long term horizon. The same strategy can be applied to assets, which are overvalued according to the investors. This makes an opportunity to create a neutrally market-exposed strategy by creating a long-short portfolio of such assets.

Value investors believe that the market tends to overreact to good and bad news, which then results in inadequate movements in assets’ prices and price deviation from long-term fundamentals. These are the events that offer an opportunity for value traders to earn a profit by buying assets on lower prices or selling at higher.

This phenomenon can be seen and is mostly applied when investing in stocks. Stocks represent one of the most volatile assets on the market. They often go through periods of high and low demand, which affects their prices, while the company’s value remains the same, or changes to a lesser extent. Speaking in numbers, it doesn’t change of what you get, if you bought a stock at $100 and next week you bought the same stock for $105. You own the stock with the same value; only you paid a higher price for it.

There are many indicators of fundamental analysis, that tells us whether the stock is over-valued or under-valued. The stocks intrinsic value is a combination of many factors such as company’s revenues, earnings, cash-flow, dividends, book value, macroeconomic factors and many more. The most commonly used metric to value a company’s stock is the Price/Book ratio. This metric measures the value of company assets and compares them to the market capitalization of a company.

The value investing can also be applied to other types of assets such as currencies or bonds. As one of the key indicators for value-investing in foreign currency can be considered its purchasing power, according to the theory of purchasing power parity. When value-investing in bonds, the key factors to be taken into consideration are credit risk, interest rate, liquidity risk or taxation differences.

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The Encyclopedia of Quantitative Trading Strategies

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