D.W. Good Inverstments originated in 1996. Built upon deep discount value investing. Here is a simple explanation.
A company in the stock exchange has shares set at a price by the market. This share price goes up and down relative to how in demand it is. This is usually different from it's actual company value or book value. Book value is the total value of the company's assets that shareholders would theoretically receive if a company were liquidated.
1. Value = Price
The company's share price is very close to it's book value.
2. Value < Price
The company's share price is much higher than it's book value. This would be an example of a company which is overpriced. Example: Apple.
3. Value > Price
The company's share price is less than it's book value. This would be an example of a sale. Example: British Banks.
Definition of 'Value Investing'
The strategy of selecting stocks that trade for less than their intrinsic values. Value investors actively seek stocks of companies that they believe the market has undervalued. They believe the market overreacts to good and bad news, resulting in stock price movements that do not correspond with the company's long-term fundamentals. The result is an opportunity for value investors to profit by buying when the price is deflated.
Typically, value investors select stocks with lower-than-average price-to-book or price-to-earnings ratios and/or high dividend yields.
Investopedia explains 'Value Investing'
The big problem for value investing is estimating intrinsic value. Remember, there is no "correct" intrinsic value. Two investors can be given the exact same information and place a different value on a company. For this reason, another central concept to value investing is that of "margin of safety". This just means that you buy at a big enough discount to allow some room for error in your estimation of value.
Also keep in mind that the very definition of value investing is subjective. Some value investors only look at present assets/earnings and don't place any value on future growth. Other value investors base strategies completely around the estimation of future growth and cash flows. Despite the different methodologies, it all comes back to trying to buy something for less than it is worth.
Is Value Investing Gambling?
Investing is not gambling when you know the value of the company.