The concept of value investing was established by Benjamin Graham and David Dodd who were both Columbia professors. At its core, value investing means buying into securities whose price is lower than their â€˜underlying valueâ€™. There are various measures to judge the underlying value and primary among them are P/E ratio, price to book ratio, book value, intrinsic value etc.
Value investors look for stocks that are trading at less than what they are actually worth and then buy into such stocks. Typically these situations arise when the market over reacts to a piece of bad news, there is a general down turn in the market or a particular stock gets beaten down more than it deserves and other such situations.
The key, is to understand that valuing a stock is always an inexact science and you need to factor in some margin for error or what has been famously described as Benjamin Graham as margin of safety in whatever price you have given to a security.