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Finance Glossary

Just call us Bond. Amortized bond.

Over 700 finance terms, Shmooped to perfection.

Value Investing

Definition:

Value investing is often considered "conservative," but in practice, that's not always how things pan out.

Value investors look for companies they think the market has undervalued. They buy them, eagerly awaiting the day when the market smartens up and all the other investors (who they think react emotionally to the market) start buying again (meaning the price goes up).

One small detail: it's almost impossible to tell what a company is really worth, which means there's no real way to tell if a company is actually undervalued.

Example

From ancient history: Yahoo! came public with its IPO in 1995. At the time, it carried a market valuation of $350 million, give or take. It was considered an astronomically high multiple on $5 million of earnings... 70x.

Yet two years later, Yahoo! earned almost $120 million—on a forward 2 year earnings multiple. Yahoo! came public at just 3 times earnings. Like the lowest multiple ever for an IPO kinda sorta.

Was it "value investing" to buy it at 70x? Courageous? Stupid?