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A value investment strategy is focused on purchase of securities trading at a discount to a reasonable estimate of their intrinsic value. While the process of determining intrinsic value certainly varies depending upon the practitioner, most share common beliefs and characteristics:  

  • The market is not efficient.  Value does not equal price.
  • A value investor regards a stock as part ownership of an operational business, not merely a symbol to be traded.
  • Value investors believe time spent forecasting and predicting the future and market direction is wasted time.
  • A long term investment horizon is essential.
  • A belief that risk is the potential for permanent impairment of value.  Risk cannot be captured in one number (such as standard deviation).
  • An unwillingness to participate in market fads.
  • Value investors tend to be contrarian.
  • Value investors focus on business fundamentals.
  • Successful value investors remove all emotion from their investment process and attempt to take advantage of ‘Mr Markets periodic irrationality.’
In general value investments fall into one of three categories:

  1. A discount to asset value.
  2. A discount to earnings power value.
  3. A discount to the value of growth within franchise.
Value investors look for opportunity across the capital structure and do not confine themselves to equity or bond silos.
In summary:
Value in relation to price, not price alone, must determine investment decisions.

For a fuller explanation of value investment, read two of the seminal texts on the subject:

Margin of Safety,  Seth Klarman, 1991. 
Security Analysis, Ben Graham and David Dodd.  First published in 1934.

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