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It was the well-known British economist, John Maynard Keynes, who observed that ‘speculative markets… are governed… by fear more than by forecast, by memories of last time and not by foreknowledge of next time.’ This remains true to this day as speculators tend to rely on past events as cues to buy or sell. Value investors have a different approach. They prefer to look keenly at individual stocks rather than attempting to gauge the market’s temperature.

Value investors

Value investors scrutinise individual stocks to get an idea of the likely future income that the said stock will provide. This is a very different approach to speculators, who are driven more by an expectation regarding whether prices will rise or fall in the short term. Value investors look at a stock’s performance over the long term. They prefer to assess whether the price of a particular stock is cheap or expensive based on the estimated long-term earnings.

By focusing their attention on the business behind the actual stock, value investors are practicing value investing. Here, the intrinsic value of a stock is the base of their decisions. The price of a stock is seen as a point of entry for value investors, or alternatively as the exit point if the price moves beyond the base value of a stock.

Keynes’ value investing

Keynes was one to focus on the future earnings ability of a particular share. This meant that he was not affected by the rollercoaster whims and trends of the market as a whole. What he seemed to care about, according to the book Keynes and the Market, was ‘the disparity, if any, between price and the estimated intrinsic value of a stock.’

The economist was an excellent bargain hunter and this, it seems, is how he made his great wealth. Keynes was after the ‘stunners’ in the latter part of his investment career. ‘Stunners’ referred to stocks that gave ‘intrinsic values… enormously in excess of market price.’

He believed that over the longer term, the inherent value in a stock would be recognised and rewarded.

Tags: Finances, investing