“Buying shares that are priced by the stock market at a substantial discount to the medium-term worth of their profit and cash flow.”
The stockmarket is far from perfect and, because of this, shares often fall substantially below their medium-term worth. This is because share prices are driven by a combination of fundamentals (such as profits and cash) and investor sentiment. It is when the latter takes hold, when human ‘animal spirits’ dominate, that big gaps develop between a share price and its correct value.
Over recent years ‘animal spirits’ have been very low and fear of losing money has dominated investment mindshare. As a result many, many equities have seen share prices fall to low single figure multiples of profits and cash flow (and to discounts to their book value), trading well below historic valuation multiples and the worth of their medium-term profits and cash flow. Value Investing is about exploiting these types of opportunities and buying these clearly undervalued shares