Value Investing

IF THE AMERICAN century were to be personified, it might well be by Warren Buffett. The so-called sage of Omaha has none of the glamour of John F. Kennedy or Marilyn Monroe, but for millions of investors he embodies the American Dream.
The 66-year-old chairman of Berkshire Hathaway Corp. is as American as baseball (he is the minority owner of a minor-league team, the Omaha Royals) and apple pie (a favorite at his local steak house). But more importantly, this plain-talking man from Nebraska makes investing seem simple. He identifies companies that are undervalued and buys their stocks to keep forever.
"To invest successfully you need not understand beta, efficient markets, modern portfolio theory, option pricing or emerging markets," said Mr. Buffett in the most recent of his direct and often-humorous letters to shareholders. "You may, in fact, be better off knowing nothing of these. 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, 10 and 20 years from now."
This strategy has enabled Mr. Buffet to turn a $100,000 investment 40 years ago into a company worth $57 billion and amass a personal fortune of almost $20 billion. His strategy has inspired countless imitators, a mutual fund dedicated to Omaha-style analysis and even a computer program designed to imitate his brain.
Mr. Buffett's success remains unique, however. That is because his brand of value-investing is surprisingly difficult. The starting point — identifying companies that are undervalued by the market — is nearly impossible for most investors because it is so painful psychologically to buy stocks that no one else wants. It is even more difficult to buy them for keeps.