What Is Value?

You’ve heard a lot about “value investing” recently, but what exactly does that term mean? Generally, value investing involves buying stocks that are out of favor and therefore undervalued relative to other stocks. That sounds like a sensible way to invest until you ask two key questions:
1. What is “value?”
2. Why can’t a stock that is undervalued remain undervalued, theoretically, indefinitely?
It’s all well and good to say that in the long run the stock market will adjust undervalued stocks to a more reasonable value, but as John Maynard Keynes pointedly reminded us, “In the long run we are all dead.”
What we need is an investing approach that not only focuses on “value” but also provides for some sort of catalyst—some outside event—that will literally force the stock market to take an undervalued stock and reprice it at a higher, more appropriate value. Let’s start with this premise: A stock is worth what the stock market says it is worth on any given day—no more, no less. You can argue that a stock is overvalued or undervalued, but if you want to buy it or sell it, there is only one value that really matters: the price the stock market is placing on that stock right now.