Dear [FIRSTNAME],

Generally speaking, value investing has three principals. The first is that the financial worth, or intrinsic value, of most assets can be estimated by a disciplined investor. Secondly, value investors believe that the prices of financial securities fluctuate more than is justified by changes to the underlying business. This is due to the curious mood swings of the market – a characteristic which was famously depicted by Ben Graham, the father of modern value investing, in his book “The Intelligent Investor”. This is the book that inspired Warren Buffet to become a value investor. The 8^th chapter of this book, which is Warrens Buffet's favourite chapter, introduces us to Mr. Market. This leads us to the third and final principal which is the logical conclusion of the first two, namely, that a disciplined investor can exploit the mood swings of “Mr. Market” and earn superior returns by purchasing securities at a discount to their intrinsic value.

Now we know the cornerstones of all value investing it should be easy to implement. Actually, implementation can vary depending on the investor how they estimate value, discounted values, acceptable margins of risk and so on. Let us take Warren Buffet, the most successful value investor of all time as an example. While some successful value investors are attracted to stocks with a low price to book ratio or high dividend yield, Buffet did not believe this was sufficient to ensure that a stock was being purchased at a discount to its intrinsic value. So execution and interpretation of value investing may differ between practitioners the principals remain the same. Also the implications for the investment style remain the same.

We have already established that one principal of value investing is a desire to exploit the irrational mood swings of the marketplace. So from there we find that all value investors will tend to be contrarian and be willing to go against the crowd. Although contrarian investing is generally considered to be a successful investment approach, it is underestimated just how difficult it is to implement. Humans have a deeply ingrained desire for social acceptance, such that it is much easier to run with the crowd than against it.

So, when a contrarian investor purchases a stock, it is an act that required remarkable confidence. By its very nature the stock will be something that many others are selling, most likely in a torrent of unfavourable news.

In one study, it was estimated that a group of the most successful US value investors had an average holding period of five years. Indeed, Warren Buffet famously described his favourite holding period as “forever”.

As a function of the two points we have just covered, many value investors are prepared to be patient for the longer-term rewards of this approach. For instance, they may sit through long periods of underperformance while the market behaves irrationally and prices of securities move further away from what they feel to be the intrinsic value. In particular, value investors tend to lag wider market in speculative bull markets as stocks soar far higher than the underlying fundamentals justify. Famously Buffet sat out the dot com boom (then bust!), whilst many market commentators thought he had lost his touch!!

For most value investors, the fact that others are being irrational is not sufficient reason for them to abandon their philosophy. While value investors have no way of knowing when the market will come to its senses, they can be confident in the knowledge that their strategy is proven over the long term. This means that investors should not view periodic underperformance as a worry, but rather as a natural function of this successful long-term investment style.

Well I hope that this has clears up a little of the mystique on what has become a hot topic over recent years in the mass media, in an easy to understand way without being too technical! But I have only scratched the surface of what value investing is in theory.