Value investing is a philosophy that applies to far more than just stock selection. Popularized by Warren Buffett and his former professor, Ben Graham, successful value investing requires an objective process to determine what a company is worth, and buying only when a price can be obtained that is significantly below that estimate. In doing so, the investor gains confidence that a margin of safety has been secured. By paying a low price, he has left a margin for his assumptions to have a degree of error and still have a positive outcome.

To me, value investing is a discipline of looking through the market’s emotions surrounding a stock and focusing on the truth behind each company. If we are able to gather the critical facts, we can come to a calm determination of what constitutes a compelling price for each individual investment candidate. In the mind of a value investor, true risk is not governed by how unpopular a company is at the moment, but rather by an objective assessment of the sturdiness of the underlying business.

True value investors welcome price volatility as an opportunity, not a threat. At times, market psychology can detach prices from fair values. This will create opportunities once in a while to profit.  However much value investing seems to make sense for the casual onlooker, it is not easy. All investors make mistakes of judgement, some more so and some less so than average. Value investors must have faith in their analysis and be comfortable acting against conventional wisdom for extended periods of time. Nonconsensus returns usually are not available on decisions based on consensus views.

Ultimately, any investor with long term goals should strive to benefit from compounding, which equates to exponential growth over the long run. The fluctuations in markets and prices in the short term, however, can render progress difficult to assess to the naked eye. In our journey to achieve compounding, the key is continous improvement. Is the investment process rational and conducive to consistent decision making? Are the risk controls restrictive enough to preclude excessive exposure to outsized positions while allowing adequate room for investors to benefit from truly outstanding ideas? Process is everything.