The goal of value investing is to choose stocks that are undervalued in the market. Value investors look for companies whose stock prices do not reflect their fundamental worth, and buy these stocks knowing that there is the potential for them to later realize their intrinsic value.
The definition of "value" in this case can differ from one investor to the next. Some value investors look for the potential for future growth and cash flows, while others look at present earnings and do not place much importance on future growth. In the end, all value investors are purchasing stocks that are priced below their perceived worth based on an estimated intrinsic value.
The biggest challenge for value investors is estimating the intrinsic value of a stock. There is no right or wrong when it comes calculating intrinsic value, and two investors with the same financial information can arrive at two different estimates. Value investors use the margin of safety to buy at a big enough discount to offset any errors that might have been made when estimating the intrinsic value. The biggest risk is that these stocks may never fully realize their intrinsic value.
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