Value

Value investing - the disciplined practice of buying assets that trade for less than their intrinsic value in an effort to gain from their long term performance. Intrinsic value? This could basically be defined as the current discounted value of the future cash flows of a business.

As an investment style, I think that value investing can be defined by the following:

An understanding of how markets are efficient
In reality only 50% of investors can beat the market so it is important to understand that by and large markets are "generally" efficient. By understanding and recognising irrational investor behaviours an investor can begin to understand how to succeed in stock market investing. However, it is fair to say that markets are not totally efficient as can be simply displayed by the periodic market corrections that we are all so familiar with.

An ability to invest with long term investment horizons
To paraphrase Ben Graham, "In the short run, the market is a voting machine, but in the long run it is a weighing machine." Understanding this simple principle enables an investor to ride out the stock market gyrations thrown at us by Mr Market. It is probably fair to say that in the short run the stock market is pretty efficient. However as most investors have relatively short term investment views, this opens up the gate to long term pricing inefficenies which can be found by investors who are prepared to wait for the market to catch up.

An ability to understand the intrinsic value of a business and to buy into that business at a realisable discount to that value
Being able to evaluate the real fundamental intrinsic value underpinning a business and then finding the opportunity to pay well below this value in order to own a piece of the business creates what is commonly known as a margin of safety. Think of it as buying £2 for £1. Moreover, an investor must have some way of searching for this value out of the universe of available investments. It would be far too time consuming for an investor to search through everything so there must be a way to screen stocks to narrow down this universe.

In combination I think these three elements give an investor a powerful set of "tools" in which to make investment decisions. However, I can't see how any one of these three skills is particularly effective when used in isolation. The old adage "fail to plan, plan to fail", is particularly important here. By producing some sort systematic methodology for investment an investor may more than likely satisfactory returns. Unfortunatly there is no exact science to it so in the beginning a lot of it is going to come down to trial and error.