Value Investing: From Graham to Buffett and Beyond by Bruce C. Greenwald

PART I
AN INTRODUCTION TO VALUE INVESTING

Chapter 1
Value Investing

Definitions, Distinctions, Results, Risks, and Principles
 What Value Investing Is
 Value investing in the manner initially defined by Benjamin Graham and
 David Dodd rests on three key characteristics of financial markets:
 1. The prices of financial securities are subject to significant and
 capricious movements. Mr. Market, Graham's famous personification
 of the impersonal forces that determine the price of securities at any
 moment, shows up every day to buy or sell any financial asset. He is a
 strange fellow, subject to all sorts of unpredictable mood swings that
 affect the price at which he is willing to do business.
 2. Despite these gyrations in the market prices of financial assets, many
 of them do have underlying or fundamental economic values that are
 relatively stable and that can be measured with reasonable accuracy by
 a diligent and disciplined investor. In other words, the intrinsic value
 of the security is one thing; the current price at which it is trading is
 something else. Though value and price may, on any given day, be
 identical, they often diverge.
 3. A strategy of buying securities only when their market prices are
 significantly below the calculated intrinsic value will produce superior
 returns in the long run. Graham referred to this gap between value and
 price as `the margin of safety'; ideally, the gap should amount to about

Value Investing: From Graham to Buffett and Beyond by Bruce C. Greenwald