Value investing is more a habit than a process of investment.

Value investing focuses on market price of a stock which is lower than the "value of the underlying business". Few stalwarts of Value investing like Warren Buffett, Benjamin Graham, John Burr and Philip Fisher, who has made the concept of value investment popular, believes that it is very important to know the "value of business" before buying any stocks. If the value of a business is more (by a multiplying factor) than its current market price of its stock then it automatically becomes a good buy. We will discuss three principals of value investing:

(1) Maintain a Margin of Safety.

Value investors makes sure before buying any stocks that its current market price is substantially below its 'value'. As a thumb rule, the market price of a stock should be 2/3 of its calculated book value. But it must be told here that book value is not the actual value of a business, it does not take care of other non-tangible values.

(2) Estimating Intrinsic Value.

Intrinsic value principal is based on one theory which says "a dollar in hand today is worth more than a dollar paid in future". This happens not only because of inflation of money but also because if one has dollars in hand today then he can invest it in deposits and earn extra interest on his investment. So, according to intrinsic value principal investors estimate a companies intrinsic value (say 10 years from now) based on its current market price.

(3) Evaluate Long term prospects

Value investors think almost opposite of traders. Traders are more focused on short term prospects of a particular stocks. Their results are based on historical behaviour of stock prices (called technical analysis). But Value investors always focuses on long-term prospects of stocks. They buy stocks with no immediate objective of selling. Long term stocks are characterized by business showing customer focus, brand name, huge market capture and above all high quality managers managing the business. Value investors buys stocks with objective of holding it forever.
Warren Buffett is live example among league of excellent value investors who follows the above value investing principals to buy business and stocks.

The Lessons of 2007.

Most of the lessons surround risk version. It is important to remember to be skeptical. It is important to not invest in things you don’t understand. It is important to remember that leverage is not a good thing or a bad thing. It is like they say with gun control. Guns don’t kill people; people using guns kill people. Leverage kills people if used wrongly. Leverage does not improve investments. It only magnifies gains and losses. So when people get silly and think leverage is a good thing and forget to be risk averse, they take on too much leverage. When you take on too much leverage and things go bad, then it can be a disaster.

“what the wise man does in the beginning, the fool does in the end,” and “being too far ahead of your time is indistinguishable from being wrong.” Well, the third important adage is “never forget the man who was six feet tall who drowned crossing the stream that was five feet deep on average.” It is not sufficient in the investment world, or any other world, to survive “on average.” You have to get through the low points and the bad days. What leverage does is that it reduces your ability to survive the bad day. So you have to realize that using leverage is a tradeoff.

It’s interesting if you think about it. As investors, enter into investments that have positive expected returns, right? If something has a positive expected return and you add leverage, then the expected return will be even higher. This is the trap. All of these things are very simple. This is not a complex business. Peoples say , “I expect 15%, and if I double up by borrowing at 5% and investing at 15%, then I’ll get 25%.” But they forget that part of their probability distribution consists of losses, and leverage will more than double the losses. This is why people must remember that maximizing returns and ensuring investment survival are incompatible.

I think another important lesson that has been understood is that the key to investing is not the art called portfolio management. The key is risk management. You can’t just buy some foreign, some large and some small, and some industrial and some financial and then think you’re safe. You can’t be so simplistic. You have to thoroughly understand the risks in the portfolio.