If you are not a finance expert, investment terms can seem complex and difficult to understand, no thanks to the highfalutin lingo. Perhaps you tune out your financial advisor at the first mention of “market capitalization” or flip the channel when business news comes up. But money and finance concepts are simple; dressed down to their basic form, the average person encounters and deals with them daily. Citi aims to simplify investing so anyone can get started early. The demystifying wealth series breaks down investment concepts so that you can be armed with the right information when you need it.

Let’s start with value investing.

Price vs Intrinsic Value

Have you ever walked by an item in a store and doubled back because you couldn’t believe the price? Perhaps the store is doing a sale (a real sale, not the “mark up prices and drop back to original” kind). Maybe you are familiar with the item’s history and/or utility so you know that the quoted price is significantly below its value. You do your checks to ensure that the item is genuine and then pay the store owner for it. You walk out of that store, elated— you can’t believe your luck in scoring such a valuable item at a reduced price.

What is Value Investing?

The scenario above paints a simplified picture of value investing— buying an item on sale because you believe its intrinsic value is higher than the quoted price. In the investment world, the price of an asset is determined by the market. The market however, is not always efficient in determining the price, meaning that a price quoted may not always be reflective of the asset’s value. In the case of the stock market, an example could be shares of a company that may be under-priced relative to the performance and scope of the company. When an investor buys those stocks believing the market will eventually catch up to its value, this is called value investing. Simply put, value investing is an investment strategy that involves finding assets priced below their intrinsic value and buying them with the expectation that they will eventually increase in price to reflect their true worth.

Benefits of Value Investing

One of the world’s wealthiest people and most successful investors, Warren Buffet, is a proponent of the value investing strategy. He is famously quoted to have said, "It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price." In other words, he believes that finding great companies that are temporarily undervalued is a key to long-term investment success. Some benefits of investing include:

1. Profitability: Buying assets at a price lower than their intrinsic value, is a highly effective way to earn significant returns in the long term. Since this approach is based on identifying and selecting solid assets that are temporarily “discounted”, it gives you the chance to own relatively inexpensive shares of proven businesses that are likely to outperform their peers down the road.
   1. The power of compounding: Value investors in the stock market are able to make even more profits by reinvesting dividends and returns obtained from value companies. This way, your earnings generate earnings, without any additional work on your part.
2. Relatively Less Risky: All investments come with some measure of risk. Nevertheless, value investing is subject to less market volatility than other short-term investment strategies. One major contributor to losses in the stock market is attempting to accurately time the profitable purchase or sale of stocks in the short term. By focusing on companies with strong fundamentals and a long-term competitive advantage, value investors mitigate risk and achieve solid returns over time.
   It is important to note here that value investing requires patience and a long-term outlook. People who are looking to reap benefits quickly might be better off opting for a different investment strategy.

How to Start Value Investing

Now that you know what value investing is and why it is an advantageous investment strategy, you may be wondering how to get started. How do you find these undervalued stocks? A good starting point would be to look at a company's financial statements to assess its financial health, as well as its current share price relative to its earnings, cash flow, and other metrics. You should also consider a company's competitive positioning and any potential catalysts that could drive the stock price higher, such as an upcoming product launch or a change in management.

Of course, value investing is not foolproof — you can still lose money if the market never recognizes the value of the stock you've invested in. It's also important to note that it can be difficult to identify undervalued stocks in today's highly rapidly changing markets. It is, therefore, crucial to do proper research and have a solid understanding of the value companies you select, and stick to a long-term plan.

If this sounds like too much work, you should consider investing in mutual funds that follow a value investing strategy. If your investment time horizon matches the growth map of such funds, they can offer great investment opportunities. Citi has a number of “value funds” to get you started on your value investing journey. Take the first step by talking to your relationship manager today.