To “value investing,” especially the second word, “investing.”

To find an appropriate definition for value investing one must first think about the term “value investing,” especially the second word, “investing.” Today, many things are considered investments: your house, virtually every stock and every bond, and even old cars. However, Graham would not consider many of these examples investments. He clearly differentiates between “investing” and “speculation.” In fact, he strongly emphasizes the importance of this difference as he writes an entire chapter in The Intelligent Investor on this topic and also provides a definition:An investment operation is one which, upon thorough analysis promises safety of principal and an adequate return. Operations not meeting these requirements are speculative. (Graham 18)Examples of speculation include “art, rare stamps, or a wine collection” (Graham and Dodd xiv). As these assets produce no income, they solely depend on the demand of the good and therefore “clearly constitute speculations rather than investments” (Graham and Dodd xiv). The term “value” derives from the notion that stocks have intrinsic value which “is different from the share price of the company” (Lim). More on the topic of determining the intrinsic value will follow in the latter part of this section.Benjamin Graham differentiates between the ‘defensive’ and the ‘enterprising’ value investor (88). Although it is generally assumed that “as investment risks rise, investors seek higher returns to compensate themselves for taking such risks” (“What Is Risk?”), Graham has a different opinion on what determines the rate of return: he does not believe that performance is “proportionate to the degree of risk” but that it is “dependent on … the amount of intelligent effort the investor” commits (88). According to his view, the enterprising investor who puts a high amount of effort into his investments will achieve “the maximum return” while the defensive investor, who puts less effort into his investments will achieve “the minimum return” (Graham 88). In the following two sections, the text will highlight the most important elements of each strategy.


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