Research Of Value Investment Theory And Its Applicability Of China's Stock Market

Value Investment is a philosophy and methods of investment which developed in the practice of U.S. stock market investment.On the issue about suitability of Value Investment in China's securities markets, both in theoretical circles or in the practice circles has been started intense discussions. However, behind these discussions, we often overlook another important issue:what is Value Investment? In other words, this controversy is based on a less solid foundation, we want to answer the second question we must find the answer of first question.Three figures represents Value Investment:Benjamin Greham, Philip Fisher, Warren Buffett. Buffett is the student of Benjamin Greham, under the influence of Philip Fisher, developed his own set of investment approach, his influence was so great that so many people regarded his investment approach as the Value Investment. Buffett claims himself to be 85% of Greham,15% of Fisher, so the approach and philosophy of Buffett and Greham should be consistent, but after closer reading in publications of Greham and Buffett, I found there are quite difference not only in their approachs, but also in their investment philosophy, some of which even are opposite, for example, Greham think highly of larger proportion of tangible assets of the company, and there are often suitable distribution of dividends and advocated diversification of investments; while Buffett would prefer a larger proportion of intangible assets of the company and advocate zero distribution of dividends and long-term investment in a small number of companies. After careful analysis, the author discovered that the reason for this huge difference is the change in market conditions as well as the development of the valuation theory, that is, from the initial origin to the present status Value Investment has already experienced great changes, if we want to answer What is Value Investment, we should have a comprehensive understanding in the the entire development process of Value Investment. The core of Value Investment is Intrinsic Value, Value Investment theory is built on the concept of Intrinsic Value, which is the Judgment Standards of Value Investments. With regard to Intrinsic Value, Value Investment school has its own strict definition, as previously mentioned, the concept of Intrinsic Value was changed, Value Investments is also corresponding changed in content, this article will strictly quote the definition of Value Investment school, for academic rigour,after completely elaborating and Analysising the concept of Value Investment, this article will sum up the concept of Intrinsic Value and Value Investment and give a definition as he foundation of discussion later.On the other hand, Value Investment representatives are only practitioners no matter how successful they are, if only take their investment approach as the content of Value Investment, Value Investment is difficult to be called a theory, precisely because of this, one of the task of this article is to restore Value Investment into theory, that means find the theoretical basis behind the investment method. Since the operation whether or not be based on Intrinsic Value is the key of division of Value Investment, naturally, how to assess the Intrinsic Value is the core of the entire Value Investment. Valuation methods is divided into the replacement cost valuation methods, asset liquidation value method, the relative valuation method, discounted cash flow method, OPM,Etc. because this article is only take the Value Investment approach to discussion, while OPM are not the part of Value Investment theory, did not involved. In these methods,is the discounted cash flow method have the the deepest theoretical base, this method originated in the Irving Fisher's capital value theory, which is the method currently used by Warren Buffett. Generation of Discounted cash flow has been making a clear definition of Intrinsic Value, but it is difficult to quantify, because the discounted cash flow method need to predict the cash flow and to determine the appropriate discount rate, and regard to share, it also need to assess the relationship between the company's financial business risks and discount rate. For these problems, the mainstream financial studies such as the efficient market theory, portfolio theory, MM theory has a clear elaboration, but the Value Investment theory is not the mainstream finance theory, in fact, they are incompatible from the the birth of Value Investment, the argument is focus on market efficiency and definition of risk. Thus, while their theoretical base is the same, but the Value Investment theory has a entirely different choices and judgments on company structure and discount rate. John Burr Williams and J.E.Walter contributed to this, combined with their point of view, Buffett improved the discounted cash flow model. From the perspective of mainstream economics can not answer such a question:Why the Intrinsic Value of the securities will exist? what is the source? what is the implementation process? what is the base of price returning to value? This problem only can be answered from the perspective of political economy, Marx is the first one who proposed dual property of goods such as value and use value, the value created by labor, the magnitude of value is determined by the socially necessary labor time, the price is determined by the value, and fluctuated around the value. Of course, the Intrinsic Value and Marx's concept of value is totally different. when the Value Investment school proposing the concept of Intrinsic Value, they only have a vague feel that there is a "value" exist in the securities, which is different from the price which is determined by the market demand and supply, then defined-it as Intrinsic Value, but there are no more thinking about this concept, through the Marx's analysis of the process of social production, we found that the so-called Intrinsic Value is actually based on the claims of present and future value creation, which is also the nature of the securities. Finally, to further clarify the scope of the Value Investment Theory, this article compare Value Investment with other securities investment method, compare objects including technical analysis, fundamental analysis and behavioral finance theory.Combining the theoretical base and the philosophy and approach of Value Investment school this theory is the so-called Value Investment Theory. On this basis, this started to discuss its Applicability of China's Stock Market.This paper first describes the development history of Value Investment in China, the article will divided this history between 1990 to present into four stages, namely in November 1990-1998 years of chaos speculative stage; 1998-2003 years, embryonic stage; 2003-2005 years in April, the initial development of the value of investments;In April 2005 since then, Value Investment continued to development.I believe there are two reasons for the controversy of Value Investment theory's Applicability of China's Stock Market:First, There is no correct understanding of Value Investment,there are misunderstanding of the Value Investment. Second, China's securities market and the U.S. stock market is different from its particularity, the existence of certain factors hindered the implementation of Value Investment. Therefore, this part of the article mainly discussed the risks of use of Value Investment in China as well as our specific market system.First of all, the use of Value Investment in China's securities market exists,two main risks in practice:the one is the risk of alienation of investment, another one is the operational risk of Fund. Second, there are development-related barriers of Value Investment in China,include (1) the Split of tradable shares and non-tradable shares. (2) the lack of scientific and reasonable exit mechanism and access mechanisms, and improper government intervention on the securities market. (3) the imbalances of overall structure and internal structural of the stock market financial products, In fact, these barriers is also the reasons for risks of investing in China's securities market in practice. Finally, the article will illustrate the present status and the development trend of China's securities market.In the above discussion, this article pointed out that the birth of value invest is in the situation of completely market, in theory, if a market is complete and non-biased, and the market fully consistent with the assumption of market school, the Value Investments do not exist, or simply exist as a force to maintain dynamic equilibrium. And vice versa, if a market is completely inefficient, and no one is concerned about the value of company, then the Value Investment can not exist. As long as the law of price and value exists, the Value Investments can exist.As long as the market develop in the trend of fighting for value of the company, the value of investments can continue to develop and become stronger and stronger. Thus, from the current development status and trends, China's securities market has the soil which is suitable for continued development of Value Investment.In the end, we offer the corresponding policy recommendations, including: improving laws and regulations, change the thinking of supervision; market expansion and acceleration of structural adjustment of market; speed up the construction of multi-level market system; widen the investment scope and attract more investors.