Chapter 6. What Is Value Investing? — Reading Intrinsic Value with PER, PBR & ROE

When a stock price fluctuates, most people look at charts. Value investors look at something different: “What is this company actually worth?“

1. The Philosophy of Value Investing

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Benjamin Graham (1934) Father of Value Investing

A stock is not an object of speculation — it is a fractional ownership of a business. The core of value investing is buying shares that trade below their intrinsic value when the market acts irrationally in the short term.

"In the short run, the market is a voting machine. In the long run, it is a weighing machine."

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Warren Buffett (1965–Present) Chairman of Berkshire Hathaway

Graham's most famous student. He evolved the approach to prefer 'wonderful companies at fair prices' over 'fair companies at wonderful prices.' He focuses on long-term investments in companies with durable economic moats — like Coca-Cola and Apple.

"It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price."

2. Intrinsic Value vs. Market Price

Core Concepts of Value Investing

구분	Intrinsic Value	Market Price
Definition	Present value of the cash flows a company will generate in the future	The price at which the stock is currently trading on the market
Determining Factors	Earnings, growth potential, competitive advantage, financial health	Supply/demand, news, sentiment, momentum
Short-Term Nature	Does not change easily	Changes every second
Investment Opportunity	Intrinsic Value > Market Price = Undervalued (buy opportunity)	Market Price > Intrinsic Value = Overvalued (wait and watch)

3. Key Valuation Metrics — PER, PBR, ROE

PER (Price-to-Earnings Ratio)

\text{PER} = \frac{\text{Stock Price}}{\text{Earnings Per Share (EPS)}}

Shows how many times the current stock price is relative to earnings per share. A PER of 10 means 'the price is 10 years' worth of earnings.'

PER Interpretation	Meaning
Low PER (e.g., 5–10x)	Potentially undervalued — but could indicate declining earnings
High PER (e.g., 50–100x)	Overvalued or high growth expectations (tech/biotech)
Industry average comparison is essential	Whether a PER of 20 is cheap or expensive only makes sense compared to the industry average

PBR (Price-to-Book Ratio)

\text{PBR} = \frac{\text{Stock Price}}{\text{Book Value Per Share (BPS)}}

Stock price relative to the company's liquidation value (book value). A PBR below 1 means 'trading below liquidation value.'

ROE (Return on Equity)

\text{ROE} = \frac{\text{Net Income}}{\text{Shareholders' Equity}} \times 100

How much profit the company generates from the shareholders' invested capital. The higher the ROE, the more efficiently the company earns money.

4. Reading All Three Metrics Together

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Measures Undervaluation

PER

Price relative to earnings. 'Am I buying cheap?'

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Measures vs. Assets

PBR

Price relative to assets. 'Is it more expensive than liquidation value?'

⚙️

Measures Profitability

ROE

Capital efficiency. 'Does this company earn money well?'

The ideal combination: Low PER + Low PBR + High ROE → An undervalued, high-quality company

5. Margin of Safety

Benjamin Graham’s core principle. If a company’s intrinsic value is estimated at ₩100,000, you only buy at ₩70,000 or below. This is your “error buffer” — protection for when your estimate turns out to be wrong.

With a 30% margin of safety: Intrinsic value ₩100 × 0.7 = only buy at ₩70 or below.

6. Practical Principles of Value Investing

Only invest in businesses you understand — if you can’t explain the business model, don’t invest
Assume a long-term hold — don’t be shaken by short-term volatility
Concentrate your investments — knowing 2–3 companies deeply is better than vaguely knowing 10
Buy the business, not the stock — focus on value, not price
Hold cash when uncertain — keeping cash for the right opportunity is also a strategy

🧠 Knowledge Check

[Key Concept Check]

Q. A company with PER 5x vs. a company with PER 50x. Is the PER 5x company automatically the better investment?

① Yes ② No

Answer: ② — A low PER may indicate declining earnings or a struggling company. You must also look at ROE, PBR, the business model, and growth potential. Comparing to the industry average is also essential.

Wrapping Up — Stock Basics Series Summary

Chapter	Key Takeaway
Ch1	Stock = fractional ownership. Returns = capital gains + dividends
Ch2	OHLCV, upper/lower limit prices, institutional/foreign/retail flow
Ch3	Candlesticks, moving averages, golden/death cross, support/resistance
Ch4	Structure of day trading, costs (fees + tax), psychological traps
Ch5	Credit buying = buying on margin. D+2 settlement, forced liquidation risk
Ch6	Value investing = exploring intrinsic value. PER, PBR, ROE, margin of safety

Stocks are not gambling. Understanding the business, waiting for the right price, and sticking to your principles is how you survive — and thrive — in the long run.

Stock Basics Ch6. What Is Value Investing? — Reading Intrinsic Value with PER, PBR & ROE