Many successful Value investors, including Oak Value Capital Management, Inc., have modified the traditional formulas put forward by Graham. There has been a significant amount of innovation and evolution of Graham's techniques, but the basic principles are just as valid today as when they were first written. Whereas Graham advocated buying stock in companies priced less than their net asset value, many current value managers tend to focus on the importance of intangibles -- the strength of the business, the quality of the product or the integrity of the management. In today's market, the sheer number of investment professionals competing for investment ideas and the confiscatory capital gains tax require the dedicated Value investor to find and hold very good businesses.

The Value philosophy rests on the principle that the market is not always priced efficiently. Value investing is predicated on the ability to find undervalued securities. We view growth and value as two sides of the same coin. In this context, value investing is simply buying growth at a discount. The value side of the coin represents the price that an investor is willing to pay for a particular security. That price should be at a sufficient discount to provide a margin of safety and thereby have a high probability of capital preservation. The concept of a margin of safety is pivotal to the successful implementation of value investing. The entire premise of value investing rests on the manager's ability to exercise judgment and discipline regarding the purchase price of a security. A margin of safety refers to the difference between the investor 's calculation of value and the price at which the security is trading in the market. There is a given margin of safety at one price level and a diminished margin of safety at a higher price level. In other words, as the price of a security approaches the investor's calculation of value, the margin of safety declines. Many a manager can identify a good business, but the successful value manager can analyze the price at which that security falls into the purchase category. The concept of a margin of safety is applicable to the purchase of common stocks, preferred stock or fixed income instruments. The other side of the coin is the growth aspect of that particular security. A company that possesses the potential to grow through business expansion over time represents the ability to buy a future stream of income that will be reflected in its future stock price. Paying a reasonable price, with a sufficient margin of safety, in an enterprise that can grow are essential to long term value investing.

Fundamental research is the foundation on which the pillar of Value investing rests. Most Value proponents use a bottom up approach (focusing on specific companies rather than the overall market level or industry sectors) to find the companies meeting their criteria. Integrity of analytical approach is important to the Value investor because it provides demonstrated evidence of the value of a company relative to its current stock price. No matter how good the story or how great the management, the value of a company lies solely with the future cash flow available after capital spending and taxes. An important requirement for most Value investors is that they understand the business they are trying to value. The preference for simple businesses, without undue complication and technological change, allows the investor to develop a complete understanding of the future prospects of the company. Since the Value investor begins with the premise that the current market price is no indication of the true worth of a business, the Value investor analyzes the company's reports and other public information to develop his own opinion of intrinsic value. The purchase decision rests on the ability to buy that security with a great enough margin of safety to ensure safety of principle and an adequate return. The second premise of the Value investor is that the stock prices will fluctuate over time but that over the long term market price will move toward intrinsic value.

The Value investors who follow Warren Buffett believe that his evolution of the teachings of Graham are important in that the emphasis is placed on a good business where the intrinsic value is growing over time. He believed that if you find a truly great growth business you would have greater margin of safety, greater returns over time, and less work because sales proceeds would not have to be reinvested. The margin of safety is greater because the intrinsic value is growing. If you buy a growth business at a sufficient discount, you should be rewarded as the intrinsic value increases. In a growing enterprise you are not forced to wait for a catalyst to unlock the hidden value (takeovers, mergers, liquidations, etc.). A good business will exhibit strong cash flow generation, significant barriers to competition, and moderate or low requirements for capital reinvestment. If one is fortunate enough to identify such a holding at a reasonable price, the rewards can be significant. Buffett has said that compounding is the eighth wonder of the world. A truly amazing example of this is Buffett's own investment record. Each $10,000 invested in Buffett Partnership, Ltd. in 1956 and reinvested in Berkshire Hathaway stock at the partnership's termination in 1969 would be worth over $100 million today after all fees and expenses. Most amazingly, the investor would have incurred only about $54,000 in income taxes during the entire 39+ year period and never have had to make another investment decision.

Investment styles tend to move in and out of favor with Wall Street. Value investing is no exception. Value investing has changed and evolved over the past several decades. The ability to be dynamic and responsive to market changes demonstrates the longevity of this investment style. Value investing offers the dedicated investor a rational approach to superior investment performance. The requirements are a reasonably good intellect, investment discipline, and the ability not to be influenced by emotion. Over the next several decades, one thing is certain -- change will continue. Unlike some trends and fads, Value investing will be around to take advantage of whatever the market is selling at a discount to its true intrinsic value; therefore continuing to reward its followers with superior returns.