Value Investing (and those that practice it) - An investment style which favors good stocks at great prices over great stocks at good prices. Utilizes such valuation measures as price to book ratio, price/earnings ratio, price to sales ratio, dividend yield, and discounted cash flow.

Value investors make a habit of relating price to value. They recognize that stock markets rise and fall. The prices of individual stocks likewise swing widely. The intrinsic value of a company lies somewhere in between. There are stocks priced about what the underlying business is really worth and stocks priced below that.

Value investors do not guess when the market or a stock is at its peak, trough, or specific points in between. There will nearly always be times when some positions are priced attractively compared to value and others when the opposite is the case. This requires business, accounting and valuation principles.

Value investors make hardheaded assessments of their competencies. If they doubt their skill in stock selection, they steer clear. Value investors know their limits, thickly drawing the boundaries of their circle of competence. They avoid investment prospects beyond those boundaries as well as anything even close to the boundaries.

Market gyrations, price-value discrepancies, and risks of overconfidence warrant exercising extraordinary caution in selecting an investment. In focusing on the business, value investors ascertain whether the business itself is substantially insulated from adversity. Value investors avoid business with permanent problems. The business itself must be fortified by a moat, a defensive barrier to ill effects such as arise from brand name ubiquity, staple products, market strength, and adequate research and development resources. Franchise value is exhibited by high, sustainable returns on equity and invested capital.

Value investors worry that they might be wrong. So the add a belt in addition to suspenders. Drawing on the point that prices are different than values, value investors insist on as large a favorable margin of difference between them as possible. Doing so produces a margin-of-safety against judgment of error.

Value investors invest only in the stock of companies known to be faithful stewards of investor capital. They seek proven track records of good judgment and fair treatment by management.

Few companies live up to the requirements of value investors when the philosophy is strictly applied. Thus few companies make it into the portfolios of value investors. It is far safer to make the error of omission than to make the error of inclusion.

Value investors view themselves as owners of a business, not simply owners of a stock. It requires a long-term view and means avoiding the rapid-fire buying and selling characteristic of the vast majority of investors.

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Source: investorwords.com; What is Value Investing? by Lawrence Cunningham