What do some of the greatest investors of the 20th century -- Ben Graham, Warren Buffett, John Templeton, John Neff, David Dreman, Marty Whitman -- have in common? They're all value investors. What makes value investing so profitable? It's the triumph of reason and long-term thinking over emotion and short-term impulses.
As Ben Graham himself used to say, in the short term, the stock market is a voting machine, but in the long term, it's a weighing machine. In other words, a stock's price is determined by human emotions on a day-to-day basis, but it bows to economic fundamentals (such as cash flow growth and dividends) in the long run.
If the stock market were efficient, value investing couldn't outperform. Thankfully, history has proven the market anything but, allowing value investors to take advantage of this inefficiency.
At the Motley Fool Inside Value newsletter, we avidly search for undervalued opportunities in midsized and large U.S.-listed companies. We're looking for truly great companies at very good prices, companies that can consistently increase their value at above-average rates and provide investors with outstanding returns over the long haul. We'll also sometimes turn our gaze toward good or even mediocre companies, if their shares present truly great prices.
But at Inside Value, we won't overpay for growth. We insist on a margin of safety: setting our buy-below price a given percentage below our estimate of a stock's true worth. We aim to consistently beat the market -- by a wide margin, over a very long time -- while minimizing risk. Our long-term focus is a key advantage: Institutional investors routinely sell companies because they can't see any upside in the share price over the next two quarters. By contrast, we think that an analyst downgrade is often a good indication that a company might be a promising prospect.
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