Investors interested in learning the basics of value investing – that is, buying an investment for substantially less than its intrinsic value – should consider reading the ultimate book on the subject: The Intelligent Investor by Benjamin Graham and Jason Zweig. This book details the art of value investing, with in-depth suggestions on how to identify, sort, and ultimately select the stocks with the most value for an investor with a long-time horizon and the ability to wait out market uncertainty or unfavorable sentiment for a significant period of time.
Time horizon is important to emphasize in the context of value investing, as the stocks identified by Graham in his revolutionary book (first published in 1949) certainly did not fit into the "get-rich-quick" line of thought many investors today have. The thought that doubling one’s money in a short amount of time is inevitable, or by hand-picking the best stocks, one can produce superior returns year after year, that buying and selling on a very frequent basis using some sort of trademarked strategy, perhaps using leverage or creating additional risk over and above the systematic and idiosyncratic risk involved with the trade, are all symptoms of speculation.
Speculation can take many forms and has many origins, but one of the most common is the "greater fool" theory. This theory centres on the idea that a company’s fundamentals aren’t as important as how other investors think about a stock. Even if a company’s fundamentals aren’t great, the willingness of another fool to buy one’s shares at a higher price, referencing the natural momentum of a stock which has been hyped-up, will lead to superior returns over time.
A wise investor will always consider fundamentals first, technicals second. Fundamentals speak to the true health of a company (a physical) while technicals show how fast a company can run. Without a proper physical, it may be difficult to determine when a sprinter indeed has ligament damage and may not be able to run any more; the fact that he/she has run in the past does not indicate his/her ability to continue sprinting forward in the future.
