Virtually every stock market trader speaks about “recognizing value.” I have set up that interest in value investing ebbs and flows according to the market. No one desires to overpay for the stock, or keep holding one if the purchase price gets nutty.

Which leads to ask a straightforward question: How can you discover value in the stock market?

It relies upon whom you ask…

The fathers of value investing, naturally, were Ben Graham and David Dodd, two teachers at Columbia Business School who wrote the investment classic, Security Analysis.

They argued that value investing is in relation to purchasing companies which have been selling below their intrinsic value.

How can you determine that? According to Graham & Dodd, that means purchasing companies that…
Deal at big discounts to book value. Gain high dividend yields. Have low price-to-earnings (P/E) ratios.
Buying therefore is not only supposed to lead to higher profits. It is also designed to offer a significant “margin of safety.” The idea is that if bought a security right, your loss is limited.

Variety of academic analyses has revealed that when you follow the ideology of Graham and Dodd, you can do well on the long period.

But one can find potential problems with this method…

Firstly, stocks are rarely as low-cost as they were back in 1930s when Security Analysis was written. Or even as cheap as they used to be back in 1982 when the typical stock sold for lower than book value and 8 times earnings and yielded greater than 6%.

And if you sat out the last 28 years out as stocks were extremely high-priced, you missed an awful lot of opportunities.

If you do discover a stock that will meets Graham and Dodd’s stringent requirements, you furthermore may have to be patient. Why? Since companies that are the lowest are out of help for a purpose. Sales tend to be flat or downward. Earnings are weak. Gain margins are low.

You can’t be successful just by buying a company that’s cheap. (It could forever turn out to be cheaper.) You need to buy a company that can one day - and maybe not too far off - be dear to others. Otherwise, when will you take profits?

Therefore possibly Graham and Dodd’s idea wants modifying. (Warren Buffett, Graham’s most recognized student, has surely established ways to change it.)

I’ve established the explanation of value as well as the tools to realize a margin of safety are flexible. Also The Oxford Club has found successful methods to bend them.

To my intelligence, one stock that goes from $10 to $50 was a “value” at $10. I don’t mind what the P/E or price-to-book was at the time. Among the luxury of hindsight, it had been clearly a discount. Why quibble?

But die-hard value traders will argue that if the stock was “overvalued” at $10, it can be only more grossly so at $50 - and therefore, you are on major danger holding it.

I oppose. If you employ trailing stops your upside is unlimited and your earnings totally protected. As long as a stock keeps trending up, we’re content to hold on - no matter what the valuation. As the stock eventually turns, as entirely do ultimately, our stops will keep the gains from slipping through our fingers.

As for value analysis, quite frankly, we don’t spend a lot of your time poring over P/Es and book values. We are now concerned about finding businesses which are likely to show dramatic, better-than-estimated growth in the quarters in the future. These shares tend to be more costly than regular, just as companies that could show a small amount or no growth are usually cheaper than average.

Growth stocks often run. Gains regularly come quicker rather than later on. Generally investors do not have the patience to be good value traders. John Templeton, for example, held firms in his flagship Templeton Growth Fund an more or less of 7.5 years.

But clients will start to grouse if a stock does not move for 6 months. They term it “dead money” and begin itching to move it to a different place.

I realize this instinct. But deep value investing and rapid investing don’t combine.

If you are a patient, really long-duration oriented trader, value investment be able to perform miracles. If you are not, you’ll be better off looking for companies that are set to smash estimates.

Once it doubles or triples - or move up 50-fold or more like Apple (Nasdaq: AAPL) and Amazon (Nasdaq: AMZN) - do not be bothered, other traders will concede it had been “value” before.

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