Definition of value investing

The definition of value investing is
“an investment that makes money by the gap/difference between true value and the price paid.”
The price paid refers to the stock price, but someone asked, “Is value investing about picking stocks with low P/E or low P/B?” It is not at all.
The Japanese translation “cheap stock investing” tends to give the impression that simply low price is good.

Value investing began with the founders of the father of value investing, Benjamin Graham and David Dodd, in their joint work Security Analysis, where they proposed
“There is an underlying fundamental economic value to financial assets, the intrinsic value of the security, and it can be measured accurately.”
“This gap between value and market price is called the margin of safety, and by buying at a certain discount, one can gain large returns as the price converges toward value.”
Thus began an investment approach that pursues intrinsic value, which is why it is called value investing.

　
Then, how is intrinsic value—the true value of a company—measured?

In short, it is measured by cash flow.

Accounting profits (and even single-period profits) and metrics calculated from stock price such as PER and PBR, or EPS, are, frankly, not reliable for investment decisions.
Around the end of the IT bubble, there were analysts who said to buy Cisco Systems (CSCO) when its PER fell to 100 times, which shows how unreliable such baselines are.

Accounting profits can be manipulated to a considerable extent by the company (legally and strategically) according to their aims.
In a sense, they are numbers with a strong element of being a “fabrication” that is legal.

Whether Sharp inflated profits through inventory buildup, or Toshiba engaging in clear fraud, there are various gray areas as well.
Accounting profits are just numbers on paper; money does not necessarily come in as those numbers suggest.
And if cash does not actually come in, salaries cannot be paid and meals cannot be bought.

If you do not circulate it in operations, you cannot sustain a company. That is why cash should be the factor.

② Differences between profits and cash flow, and the risks?

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