Three Principles of Value Investing

Based in Fort Worth, Texas, Shaun Hayes serves as a wealth manager at McElhenny Sheffield Capital Management. Shaun Hayes has developed strong relationships with his clients in and around Fort Worth, Texas, through his innovative investment strategies. He counts value investing among his favored professional interests.

The concept of value investing traces its roots to the first half of the 19th century with the 1947 publication, The Intelligent Investor. The investment approach described in this book focuses on identifying truly undervalued stocks, purchasing them, and maximizing returns on the investment. Warren Buffet is one of the most influential proponents of value investing. Here are three principles of value investing.

1. Inherent value: Value investing is typically viewed as the opposite of growth investing, because it does not assess a stock's future potential. Instead, value investors must make a subjective estimation of a stock's inherent value to ascertain whether or not it is currently undervalued.

2. Investor irrationality: In value investing, the concept of investor irrationality explains what causes stocks to be undervalued. The idea centers on the belief that human error is responsible for an inaccurate valuation, and savvy investors may eventually profit from it.

3. Margin of safety: To find the inherent value of a stock that has been devalued by investor irrationality, a value investor must perform a margin of safety evaluation. Devised to protect investors, the concept is used to determine an adequate margin of safety for investing in an undervalued stock. Many investors look for margins of safety of 40 percent or higher.