15 Value Investing Tips From Legendary Investors

By Joe Tenebruso Markets Fool.com

Value investing is a proven strategy for generating enormous wealth in the stock market. To help get you up to speed on this investing strategy, here is a collection of valuable tips from some of the greatest value investors of all time.

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1. "All intelligent investing is value investing -- acquiring more than you are paying for. You must value the business in order to value the stock." -- Charlie Munger

Stocks are not just pieces of paper or blips on a computer screen, they represent part-ownership of a business and a legal claim on its cash flows. That's why a value investor strives to calculate the intrinsic -- or true -- value of a business. Only then can you value its stock and identify genuine bargains.

2. "Rule No. 1: Never lose money; Rule No. 2: Never forget Rule No. 1." -- Warren Buffett

Value investing is inherently defensive. A value investor constantly tries to purchase assets for less than they are worth. By doing so, you are protecting your downside and reducing the probability of a permanent loss of capital.

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3. "Confronted with a challenge to distill the secret of sound investment into three words, we venture the motto, Margin of Safety." -- Ben Graham

Wise investors give themselves room for error. A margin of safety -- or the difference between your estimate of the intrinsic value of a stock and its market price -- provides an added layer of protection when investing. The larger the margin of safety, the lower the risk, and, ultimately, the higher the potential gain.

4. "The most common cause of low prices is pessimism sometimes pervasive, sometimes specific to a company or industry. We want to do business in such an environment, not because we like pessimism but because we like the prices it produces." --Warren Buffett

It's often during times of distress that stocks trade at prices that value investors would consider to be supplying an adequate margin of safety. Rather than to be feared, these turbulent periods should be appreciated for the valuable gift they provide: opportunity.

5. "Cash combined with courage in a time of crisis is priceless." -- Warren Buffett

To prepare for these opportunities, investors should maintain some dry powder in the form of cash reserves. In addition, you must develop the confidence to act in times of great uncertainty, while still maintaining the humility to realize that you are working with imperfect information.

6. "Move only when you have an advantage." -- Charlie Munger

Many people make the mistake of swinging at too many pitches. The best investors know to wait for an opportunity that falls squarely in their circle of competence. Only then can we hope to have an edge -- be it informational or, more likely, analytical -- we can exploit to our advantage.

7. "We don't have to be smarter than the rest. We have to be more disciplined than the rest." -- Warren Buffett

Many times an investor's edge is behavioral. It can arise from the ability to simply wait for attractively priced opportunities. Yet while it's simple in theory, it's not always easy to do. In fact, having the self-control to not give in to greed when all those around you are losing their discipline and chasing gains is a rare ability, characteristic of the most successful investors.

8. "Everyone tends to see the same things, read the same newspapers and get the same data feeds. The only way to arrive at a different answer from everybody else is to organize the data in different ways, or bring to the analytic process things that are not typically present." -- Bill Miller

Another powerful investment edge can be obtained from your ability to see the world differently than others. To make connections other investors do not or cannot see, Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B) vice chairman Charlie Munger recommends developing a latticework of mental models forged from the most important principles of all the major academic fields.

Motley Fool co-founder David Gardner offers an additional suggestion: Live an interesting life.

9. "Interestingly, we have beaten the market quite handsomely over this time frame, although beating the market has never been our objective. Rather, we have consistently tried not to lose money and, in doing so, have not only protected on the downside but also outperformed on the upside." -- Seth Klarman

It's common doctrine that investors must incur greater risk in order to achieve greater rewards. Yet in my experience, and in the experience of many top value investors, that's just not true. Often the best returns come from investing in the most competitively advantaged -- and therefore lowest-risk -- businesses.

10. "In the short run, the market is a voting machine, but in the long run it is a weighing machine." -- Ben Graham

A stock's price can deviate from its intrinsic value by a large margin. That's because in the short term, a host of factors unrelated to the actual performance of the business can impact market prices. Yet over the long term, the price of a stock tends to reflect the cash-generating ability of its underlying business, which is what a value investor strives to estimate.

11. "If it's close, we don't play." -- Ben Graham

Although value investors attempt to predict the future cash flows of a business, you must always remember that even the best valuation models can produce, at best, only a rough estimate. The many assumptions upon which valuation models are built are nearly impossible to predict, and prone to error. That's why the best value investors look for bargains that are obvious, and pass on situations where the value is less clear.

12. "You can't do the same things others do and expect to outperform." -- Howard Marks

Value investing is innately contrarian. When you say a stock is undervalued, you are saying that the current market price is wrong. So to be a successful value investor, you need to have a variant perception -- and you need to be right.

13. "In an environment with massive short-term data overload and with people concerned about minute-to-minute performance, the inefficiencies are likely to be looking out beyond, say, 12 months." -- Bill Miller

One of the most effective ways to act differently than other investors is to adopt a long-term mindset. Wall Street tends to focus on quarterly results, which are just a tiny fraction of a business' life. Value hunters who base their investment decisions on the long-term future of a business -- say three to five years out, or more -- can use the market's short-term overreactions to their advantage.

14. "Your goal as an investor should simply be to purchase, at a rational price, a part interest in an easily understandable business whose earnings are virtually certain to be materially higher five, ten, and twenty years from now." -- Warren Buffett

In the end, this may be the most practical advice when it comes to value investing -- and the most powerful. If you can purchase an excellent business at a reasonable price that goes on to successfully grow its profits over many years, you can do very well as an investor. Purchasing the stock at a bargain price will amplify your returns, but being correct about the quality of the business is far more important.

15. "It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price." -- Warren Buffett

This concept of investing in elite businesses is the foundation of my own investment philosophy. It, and the other value investing tips listed above, have served me well, and I expect they can do the same for you.

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The author(s) may have a position in any stocks mentioned.

Joe Tenebruso has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.