Warren Buffett has become the most famous investor on the planet by following a simple philosophy: value investing. By looking for stocks that trade at prices below their intrinsic value, Buffett has put together a huge track record of success. But in trying to replicate Buffett's returns, many investors don't understand everything they should about value investing.
In the following video, Dan Caplinger, The Motley Fool's director of investment planning, discusses three things that many people don't know about value investing. First, Dan begins by explaining that value has nothing to do with share prices, as Bank of America (NYSE:BAC) has a market capitalization twice as large as Goldman Sachs (NYSE:GS) even though Goldman stock trades at more than 10 times the share price of Bank of America. Second, although many value investors think that high-multiple stocks Baidu (NASDAQ:BIDU) and Visa (NYSE:V) by definition can't be value stocks, Dan points out that you have to consider growth in determining intrinsic value. Finally, Dan points to the mistakes many investors make in believing that certain sectors of the market always belong to the value camp, using examples of consumer stocks and tech stocks as going against the traditional definitions of value stocks right now.
Fool contributor Dan Caplinger owns shares of Berkshire Hathaway. The Motley Fool recommends Baidu, Bank of America, Berkshire Hathaway, Goldman Sachs, and Visa and owns shares of Baidu, Bank of America, Berkshire Hathaway, and Visa. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.