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What is the Value Investing Paradigm?

written by: Jason C. Chavis•edited by: Rebecca Scudder•updated: 6/28/2011

While there are a number of different concepts and theories about investing, one of the most time-tested is the idea of value investing. Understanding the paradigm helps an investor choose stocks that are a great value and are more likely to provide a significant return than other securities.

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    Value investing strategy is a concept based on the basic ideas of investment and speculation. The concept was first proposed at the Columbia Business School in 1928. Two teachers, Ben Graham and David Dodd, polished the idea and released a book on value investing in 1934 called Security Analysis. The root concept of the paradigm is to purchase securities that appear to be underpriced due to some sort of feature. The way to determine this fact is by conducting strong fundamental analysis of shares for value stock investing, particularly when using free online value investing software.

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    Process of Finding Value Stock Investing

    The proper steps taken in deciding on a value investment is to look at a company's financial statements and determine the overall health of a company, and then determine its advantages in the marketplace and how its competitors fair in comparison. Taking into account a share's price history and present status is also imperative. This helps an investor make a proper forecast of the future prospects of the stock. A number of other facets must be taken into account as well. These include an analysis of business decisions being undertaken as well as a judgment about management. One must also account for the assets and cash flow and to what degree these will lose their value. Credit risk is also a very important issue to take into account.

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    Changes in the Concept of Value Investing

    Value investing has changed over the course of time. Graham and Dodd originally called for a very cautious approach to investing. The goals were to pick stocks using defensive concepts, making sure one only purchased shares that trade below their book value. Using this method helps ensure that future shifts in the market will be safely dealt with.

    Throughout the second half of the 20th century, the value of intangible assets became hard to quantify. Patents, branded products and software changed the dynamics of accounting and investing. This was amplified by the continuing evolution of technology, which made judging the exact book value of securities that much more difficult. The new method by which the book value was determined became finding the cash flow values of an asset in the future and discounting it to the present.

    Investors have various tools to aid in this endevor including free online value investing software. Investors looking for help with value investing can turn to value stock investing newsletters and value investing funds.

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    Analyzing the Success Using Free Online Value Investing Software

    S&P 500 P/E Ratio 1871-2008 

    The overall success of value investing can be evaluated by a number of methods. This includes analyzing the value of purchasing stocks with low price-to-earning or price-to-cash-flow ratios by using free online value investing software or other options. One can track the successes of buying these securities and according to numerous economists, using this method outperforms traditional growth stocks that yield a high return on equity. They also usually outperform the market as a whole.

    Above: S&P 500 P/E Ratio 1871 to 2008. (Supplied by Zane Selvans at Wikimedia Commons; GNU Free Documentation License; Creative Commons Attribution ShareAlike 3.0;