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Investment Philosophies by Aswath Damodaran2

(BQ) Part 2 book "Investment philosophies" has contents: Graham’s disciples - Value investing; the allure of growth - Small cap and growth investing; information pays - Trading on news; a sure profit - The essence of arbitrage; the impossible dream? timing the market;.and other contents. | 1 CHAPTER 8 GRAHAM’S DISCIPLES: VALUE INVESTING Value investors are bargain hunters and many investors describe themselves as such. But who is a value investor? In this chapter, we begin by addressing this question, and argue that value investors come in many forms. Some value investors use specific criteria to screen for what they categorize as undervalued stocks and invest in these stocks for the long term. Other value investors believe that bargains are best found in the aftermath of a sell-off, and that the best time to buy a stock is when it is down. Still others adopt a more activist approach, where they buy large stakes in companies that they believe are under valued and push for changes that they believe will unleash this value. Value investing is backed by empirical evidence from financial theorists and by anecdotal evidence – the success of value investors like Ben Graham and Warren Buffett are part of investment mythology – but it is not for all investors. We will consider what investors need to bring to the table to succeed at value investing. Who is a value investor? Morningstar is a widely used source of mutual fund information, and it categorized 38% of mutual funds as value funds in 2001. But how did it make this categorization? While it did look at the way these funds described themselves in their prospectuses, the ultimate categorization was based on a far simpler measure. Any fund that invested in stocks with low price to book value ratios or low price earnings ratios, relative to the market, was categorized as a value fund. This is a fairly conventional categorization, but we believe that it is too narrow a definition of value investing and misses the essence of value investing. Another widely used definition of value investors suggests that they are investors interested in buying stocks for less that what they are worth. But that is too broad a definition since you could potentially categorize most active investors as value investors on this