Article

China Accounting and Finance Review

, 16:5

First online:

Open Access This content is freely available online to anyone, anywhere at any time.

Value Investing: Bridging Theory and Practice

  • Charles M. C. LeeAffiliated withStanford Graduate School of Business Email author 

Abstract

Value investing refers to the buying or selling of stocks on the basis of a perceived gap between their current market price and their fundamental value – commonly defined as the present value of the expected future payoffs to shareholders. This style of investing is predicated upon two observations about publicly listed companies and their stock prices: (1) a share of stock is merely a fractional claim on the futures cash flows of an operating business, and that claim is the basis of its long-run value; (2) over shorter horizons, prices can deviate substantially from the long-run value of the stock. Value investors buy stocks that appear to be cheap relative to their intrinsic value and sell (even sell short) stocks that seem expensive.

Keywords

Cash Flow Stock Price Stock Return Residual Income Investor Sentiment