Meet the Value Investor

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Hang around these parts long enough and you're bound to hear us Fools talking about value investors. Who are these cheapskates?

Everything has a price
Benjamin Graham and David Dodd first defined value investing in the classic tome Security Analysis, which was first released in 1934. Graham and Dodd argued that it was possible to discern the "intrinsic value" of any stock. It was a radical idea at the time; the wreckage of the 1929 crash led many to compare investing to gambling.

Graham pierced that myth with decades of successful investing, teaming with partner Jerome Newman to return an average of 17% annually over 30 years to holders of the Benjamin Graham Joint Account. They employed a value strategy that was further defined in 1973's The Intelligent Investor, which Warren Buffett has called the "best book on investing ever written." Among the new ideas introduced at the time was buying with a margin of safety -- that is, buying stocks on sale.

Are you a value investor?
Often, you'll hear that there are two types of investors, value and growth. The truth is there isn't much difference. Every investor prefers to buy cheap stocks; it's just that growth investors generally seek businesses that are rapidly improving their sales and earnings, but whose price tag doesn't reflect the quality of the growth being created.

Value devotees, on the other hand, are more likely to buy the stocks of companies that are experiencing problems, which, in turn, have created sharp drops in their share prices. Why? Investors are highly likely to overreact in such situations, creating a bargain for the patient stock picker. That's why struggling retailer Sears Holdings (Nasdaq: SHLD) ranks among the top picks of superstar investors, according to GuruFocus.com. Other recent picks include Dell (Nasdaq: DELL), down roughly 50% over the trailing 12 months, as well as Intel (Nasdaq: INTC) and Interpublic Group (NYSE: IPG), each down more than 30% over the past year.

A cheapskate hall of fame
Unfortunately, there's no way to accurately or fairly give you a rundown of the best value investors of all time. With apologies to the dozens I've missed, here are a few that stand out in my memory:

• Warren Buffett: Chairman of Berkshire Hathaway, Buffett has produced 20%+ annual returns for more than two decades.
• Charlie Munger: He doesn't get as much attention as business partner Buffett, but look at how Wesco Financial (AMEX: WSC), the holding company Munger directs, has performed.
• Wally Weitz: Weitz is the manager of Weitz Value (FUND: WVALX), which has beaten the S&P 500 by more than 5% annually over the past 10 years.
• John Neff: Former manager of Vanguard Windsor (VWNDX), he bought stocks trading for cheap price-to-earnings multiples and beat the S&P by an average of 3% annually over the course of 31 years.
• Marty Whitman: Whitman manages Third Avenue Value (FUND: TAVFX), which has returned an average of 16.74% annually since opening for business 16 years ago.

Follow the money
I wish there was a perfect stock-picking strategy. There isn't, unfortunately, but value is pretty close. If you're interested in learning how to find cheap stocks, start with our Fool's School, then read Buffett's excellent and informative letters to Berkshire Hathaway shareholders (available here), then graduate to The Intelligent Investor. If you find that value investing is right for you, we even offer a whole newsletter devoted to the topic, Motley Fool Inside Value.

For more on getting started with investing, consider giving Motley Fool GreenLight a try. Our new personal finance newsletter service tackles all aspects of managing your money, including how to invest it. Click here to learn more.

Fool contributor Tim Beyers owns shares of Interpublic and Berkshire Hathaway. Check out all of his stock holdings at Tim's Fool profile. Dell and Intel are Motley Fool Inside Value selections. Dell is a Stock Advisor recommendation.ThirdAvenue Value is a Motley Fool Champion Funds pick. The Motley Fool has an ironclad disclosure policy.