Those of you who have been reading the site for years know that I'm an unapologetic value investor. I believe that those who are going to experience the greatest net worth, as history has apparently pointed out time and time again, are those who focus on getting more value for their dollar than they pay for at the time of the acquisition. Benjamin Graham called the difference between the real, or intrinsic value, and the market price that people were willing to pay a "margin of safety". If you owned shares of a company that sold at $20 and had no debt with $15 per share in gold coins, you wouldn't need to worry if the share price fell to $8 because you had the value of the bullion that provided a solid foundation.

The thing is, successful value investing isn't just limited to stocks. The reason I mentioned coins was because of the article on collectibles that I published a few weeks ago. Today, I came across a story about a man named John Jay Pittman that made only $10,000 to $15,000 per year working as a chemical engineer for Kodak. According to the story, over his lifetime, he and his wife investing around $100,000 in a collection of rare gold and other coins, which ultimately brought approximately $30,000,000 at auction! This is not a fluke; the man understood value. Just like Warren Buffett at Berkshire Hathaway, or Bill Gross in the world of bonds. The key is knowledge and knowing when, for one reason or another, the price of an item has gotten temporarily out of whack with its underlying characteristics.

Don't make the mistake of believing that a value based approach means that you can only buy cheap or worn-down assets. True value means you can afford to pay more, but you're still getting a bargain relative to the worth of the item itself. I'd be much happier paying 15x earnings for a business that had economic characteristics like Johnson & Johnson over a twenty year period than I would one that required massive capital expenditures, earned less than 5% on invested capital, and was trading at 7x earnings. Few people understand this vital difference!

If you are interested in value investing, take a moment to review these articles:

Seven Tests of Defensive Stock Selection: Keys to Putting Together a Conservative Portfolio of Common Stock Based Upon the Work of Benjamin Graham

How Falling Stock Prices Can Make You Rich

How to Think About Share Price

Finding Hidden Value in the Market