Nothing can move a stock like a change in expectations, particularly when high expectations don't pan out.

It can happen slowly, like hot lava destroying everything in its path. Or it can happen quickly, like a thunderstorm popping up in the Midwest. Either way, value investors try to stay away from high expectations. That's because buying into them often leads to low returns or even a permanent loss of capital.

Lava flows
It's been a rough year for homebuilder Toll Brothers (NYSE:TOL) and fashion retailer Urban Outfitters. These two companies were once darlings of the stock market, and investors were willing to pay rich prices to own their shares. Unfortunately, these two very good operators have seen their stock prices almost cut in half in 2006. Worries of real estate bubbles, tapped-out consumers, high gas prices, and Paris Hilton cutting an album (OK, maybe I stretched a bit on that one) have taken the wind out of their sails.

It's tough to pass up buying stocks with rising prices. No one likes to be left out. But we have to figure out how to buy great companies at low prices, not high ones.

Recently, isolated storms have popped up and taken their toll on these companies. Career Education (NASDAQ:CECO) saw revenues fall, made an asset write-down, and is now being investigated. Wound care specialist Kinetic Concepts (NYSE:KCI) survived a patent infringement storm only to be struck by lightning when it learned that BlueSkyMedical did not infringe on Kinetic's patent and can offer a competing product under the same Medicare reimbursement code. Scottish Re (NYSE:SCT) literally fell off a cliff when it reported an unexpected loss and announced the CEO was leaving. eCollege (NASDAQ:ECLG) caught many investors off guard by missing its third-quarter profit estimates. Chico's FAS (NYSE:CHS) recently reported that same-store sales will turn negative in August, marking the end of a nine-year run.

In these situations, storms seemed to come out of nowhere to wreak their havoc. Does it mean these companies have suddenly turned bad? No. Falling prices usually mean expectations were too high.

Those three words
Nature is amazing. Time and time again, after disaster strikes, opportunity arises. When storms knock down older trees, light is exposed to the ground, allowing new plants and trees to grow, which provide food for bugs, which attract animals, etc., etc.

The same can happen in the stock market. After a fall, stocks can become bargain opportunities, but only under the right conditions. How did companies like Williams Companies, Procter & Gamble, Capital One, and, to name a few, become great investments after getting caught in a storm? It's not just because they're great companies. It's also because investors recognized three little words: margin of safety.

At our Inside Value investing service, we demand a margin of safety from every investment recommendation we make. That means we insist on price being lower than our estimate of a company's value.

We do this for two reasons. First, if our estimate of value is off, then we usually have some protection on the downside, as stocks with low prices relative to value tend not to fall very far. Don't get me wrong; stocks can always go even lower. But it's nice to have a shelter within running distance if we're caught out in a storm.

The second reason has to with the upside: The larger the margin of safety, the higher the returns as price and value converge.

That's the great thing about margin of safety. We protect ourselves from catastrophic losses while increasing the odds of beating the market. What more could investors want!

The Foolish bottom line
It's never too early to protect yourself from stock market disasters. That why Philip Durell, lead analyst at Inside Value, only recommends companies with significant margins of safety. He's disciplined and is not going to pay too much for a stock.

So to start reaping the benefits of margin of safety, click here to sign up for a free trial of Inside Value. Not only will you get to see where Philip is finding opportunities today, but you'll see what it's like to avoid storms and generate great returns.

David Meier is a member of the Motley Fool Inside Value team and does not own shares in any of the companies mentioned. is a Stock Advisor recommendation. The Motley Fool has a disclosure policy.