What is value investing in the stock market?

Value Investing is the time-tested approach to simply evaluating the stock market and choosing the best individual stocks to invest in.  Value investing relies upon strong underlying fundamentals that set the stock apart from the rest of the stock market.  Value investments are conservatively valued and provide opportunity for strong total returns, with a strong “margin of safety” should adverse events occur.

Let’s be clear however.  As Graham points out in Security Analysis, it is not an exact science: “The essential point (of intrinsic value) is that security analysis does not seek to determine exactly what is the intrinsic value of a given security. It needs only to establish either that the value is adequate -e.g., to protect a bond or to considerable lower than the market price. For such purposes an indefinite and approximate measure o f the intrinsic value may be sufficient.” (Graham, p.66)

The premise behind value investing or picking the best value stocks is to minimize the risk of investment as defined by Benjamin Graham – permanent loss associated with acquiring a stock.  If the stock is conservatively valued when purchased and held, the investor should be indifferent to the overall stock market increasing or decreasing.

Labeling a stock a value investment does not make any assumption of its overall stock market outperformance over any defined period.  Never let anyone convince you that they can accurately predict what will happen in the market and which stocks will perform the best.  In some instances, value stocks perform worse than the overall market (its financial conditions deteriorate or simply the market speculatively favors other companies).