Warren Buffett, the wealthiest businessman and a talented investor, made much of his amazing fortune on value investing. Introduced by Benjamin Graham in the 1930s, the concept suggests buying and holding undervalued stocks. With time, the market sentiment alters and the true worth comes to the surface, bringing good returns.
But as any strategy, value investing has its benefits and traps.
The power of compounding. Value investing makes the most of the magnifying power of compounding. Your investments increase dramatically if you reinvest dividends and returns obtained from value companies. Thus, in the course of time, you benefit well from interest on interest. This is exactly what Warren Buffett holds dear, and we have reasons to believe him.
Reliable blue chips. Value investors consider the overall potential of a company, rather than shares and market sentiments towards them. They seek ownership in a well-established business that is able to make money and yield high earnings. As a matter of fact, value investing proponents prioritise sound and safe blue chips over small caps.