1. What do all these people really mean when they say that they are value investing?
2. What makes a value investor?
Let's be clear from the start. Ben Graham was an investor. Warren Buffett is an investor. Mason Hawkins is an investor. The term value investing was given to their style simply to define what they do best: finding value--companies worth more than their current market price--investments.
In my opinion, the best definition of an investment was given by Ben Graham in Security Analysis:
"An investment operation is one which, upon thorough analysis, promises safety of principal and a satisfactory return . Operations not meeting these requirements are speculative."
Charlie Munger said it best when he remarked:
"Our investment style has been given a name - focus investing - which implies ten holdings, not one hundred or four hundred. The idea that it is hard to find good investments, so concentrate in a few, seems to me to be an obvious idea. But 98% of the investment world does not think this way. It's been good for us."
The key to remember is that a value investing does not exist in bull markets. Just about any approach during bull markets will make you money. As Seth Klarman aptly put it Bull markets "have of way of making everyone look like a genius." A true value investing based approach is designed for bear markets. A value investor's approach is one that can weather the storm during the bear markets and come out with a minimal loss of capital. A successful investing record should be measured in bear markets alone. Earning 90% in a year when the overall market is up 25% tells me zilch about your abilities as an investor. Just look at how many Internet funds were up over 100% per year during their heyday. Losing 10% when the market has tanked 25% on the other hand shows me that an intelligent and disciplined approach was used in making investment decisions.
As Warren Buffet said "Investing is simple, but not easy." There are only three types of stocks: undervalued, overvalued, and fairly valued. What determines the category is simply the price you pay. The worst business in the world can still be undervalued at the right price. So based on the price you pay, the business will either be overvalued, fairly valued, or undervalued. One simply must sell the first, ignore the second, and buy the third without any deviation in approach. This is intelligent investing.
Finally, people become more confusing when they start talking about value investing and growth investing as if they were too separate methods of operations. All good investments have to grow and make money in order for the investor to generate returns. Any investment deemed a value must have a catalyst that will unlock this value. Usually these catalysts arise of some sort of management activity that will in some way make the company more profitable in the future. The key to this process is time and most investors define an adequate period of time as the next earnings quarter. As long this investor misguidance continues, the true intelligent investors should continue to excel above the rest.