Introduction
Value investing is an investment strategy that relies on identifying undervalued companies selling at a discount price relative to their intrinsic value. Pioneered by Benjamin Graham and popularised by Warren Buffet, value investors focus on business financial metrics and market positioning to determine company valuations strictly from a business point of view. Value investors conduct asset purchases when the selling price (i.e., market capitalisation) lies significantly below the business intrinsic value, thus realising profits when the market corrects such anomalies. Value investing requires patience and a stable temperament to conduct and maintain investments successfully over the long term, as it may draw conclusions at odds with the present opinion and current trends in the markets. By steadfastly focusing on financial fundamentals and competitive advantage, value investors establish positions independently of temporary market swings, eventually realising attractive returns (Greenwald et al, 2020; Buffett and Clark, 2011).
The surge of artificial intelligence (AI) has seen many applications in the economy, least of all in financial technology (fintech). AI can streamline and simplify many of the processes involved in value investing, such as:
Fundamental Analysis
Analysis of fundamental business metrics: Performance indicators such as ROE, ROA, debt ratio, etc. can be analysed swiftly by AI. Analysis and comparison of business performance within an economic sector or region. Detection and early warning of foreseeable problems, before they are reflected in financial statements and market valuations.
Competitive Advantage
Through the analysis of business press, blogs, industry opinion and market sentiment, AI can establish the presence of a business competitive advantage conducive to above-average results. AI may be able to adjust itself to the different kinds of competitive advantages (brand, logistics, patents, etc.) and analyse the positioning of a business against competitors trying to emulate or erode its competitive edge.
Market Sentiment
A key principle of value investing is establishing a business intrinsic value, independently of prevailing market moods. Since stock markets fluctuate unpredictably, at times enabling fear or greed to drive prices beyond rational expectations, value investors may capitalise on these market swings to lock in purchases that will provide appropriate returns in years to come. By analysing news, blogs, business press, economic forums and market indicators, AI may accurately gauge negative market sentiment driving down company valuations, providing superior buying opportunities for the astute investor.
Conclusion
Although value investing remains a historically proven market strategy, it can be considerably optimised by utilising AI. By analysing extensive datasets, identifying patterns and delivering accurate forecasts, AI can provide investors with a decisive investment advantage. In today's data-driven investment environment, utilising AI tools can mean the difference between average and outstanding investment results. It is the aim of this research to explore how AI can enhance and streamline value investing for institutional and retail investors alike, consolidating the efficacy of this proven approach in today's complex investment landscape.
References
Buffett, M. and Clark, D. (2011) Warren Buffett and the Interpretation of Financial Statements: The Search for the Company with a Durable Competitive Advantage. New York: Scribner.
Greenwald, B. C., Kahn, J. and Bellissimo, E. (2020) Value Investing: From Graham to Buffett and Beyond. 2nd edn. Hoboken, NJ: Wiley Finance.
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