The Core Principles of Value Investing: Understanding True Worth and Build Safer Investments

Prices move quickly, and news headlines can create panic or excitement. It’s not always easy to know which companies are truly worth your attention. For long-term investors, the key isn’t following every market swing - it’s understanding the real value of a business and making thoughtful, disciplined decisions that can be tracked and analyzed over time to learn from both successes and mistakes.

In this chapter, we’ll explore the core ideas behind value investing: how to get a sense of a company’s true value, how to protect yourself when markets are unpredictable, why some companies remain strong over decades, and how patience and emotional control can make a real difference in long-term results.

Understanding Intrinsic Value: What a Stock is Really Worth

One of the most important ideas in value investing is intrinsic value. Term which represents an estimate of what a company is truly worth, based on its financial fundamentals and long-term prospects, rather than its current market price. It is calculated from analyzing earnings, assets, cash flows, and the company’s ability to grow and generate value over time. While market prices can be volatile and driven by emotion or short-term news, intrinsic value reflects what a rational, long-term investor believes a business should be worth.

After I first came across the idea that a single number could represent the true value of a company, a natural question appeared: if intrinsic value reflects what a business is truly worth, why not simply buy stocks trading below that value and expect guaranteed positive returns over time? In practice, intrinsic value is not a precise number but an estimate, and different valuation methods can produce very different results. Each approach comes with its own assumptions, strengths, and weaknesses, and none can perfectly predict the future. This uncertainty is why buying below intrinsic value alone is not enough, and why value investing requires both judgment and humility.

A simple way to understand why price and value can differ is to think about selling a house. The value of a house is based on relatively stable factors such as its location, size, condition, and long-term usefulness. However, the price it sells for can vary widely depending on circumstances. If the owner needs to sell quickly due to a job relocation, financial stress, or a weak housing market, the house may sell below its underlying value. In contrast, during a boom fueled by optimism and easy credit, the same house might sell for far more than it is truly worth. The house itself has not changed overnight—only the emotions, urgency, and expectations of buyers and sellers have. Stocks behave in much the same way, except prices can change daily or even minute by minute. Market prices reflect short-term sentiment, while value reflects long-term fundamentals, and that gap is where opportunities for value investors arise.

We will explore this idea further in the next sections, but from my perspective, it is best not to rely on a single formula for calculating intrinsic value. Instead, it is wiser to consider multiple approaches and look for methods that have historically produced reliable estimates. By comparing different calculations, an investor can build a more informed view of what a stock is truly worth.

Margin of Safety: Protecting Yourself from Mistakes

Once we understand intrinsic value, the next question is: when should you buy a stock? The principle of margin of safety comes handy at this stage. Simply put, Margin of safety means purchasing a stock at a price below your estimate of its intrinsic value, leaving a “buffer” in case your calculation is off or unforeseen events affect the business. 

A simple analogy is buying a used car: if you think a 10-year-old car is worth €10,000, you might negotiate to pay €9,000. That extra €1,000 protects you if the car has hidden issues or if your assessment of its value was slightly optimistic. In the stock market, finding stocks below intrinsic value is already uncommon; finding ones that also offer a meaningful margin of safety is even rarer. This is why patience is one of the most important virtues in value investing - the right opportunities don’t appear every day, and waiting for them is part of the game.

Economic Moats: Why Some Companies Stay Strong for Decades

Once we’ve covered the numbers, it’s time to look at a concept that’s harder to quantify: economic moats. An economic moat is a sustainable competitive advantage that protects a company from competitors and helps it maintain long-term profitability — much like the water-filled trenches around a castle. Everyday examples include:

• Brand recognition: People choose Coca-Cola not because it’s the cheapest soda, but because they trust and recognize it. A new competitor can’t easily replace that loyalty.
• Switching costs: Changing your phone ecosystem or main email service can be annoying and risky. Even if another option is slightly better, most people stick with what they know.
• Scale advantages: Large supermarkets can buy in bulk and sell cheaper, making it hard for smaller shops to compete.
• Unique access or legal protections: Companies with patents, exclusive rights, or special licenses can operate in ways competitors legally cannot.

A standout example is Apple. Its ecosystem — iPhone, Mac, AirPods, iPad, and services — is designed to make customers more likely to buy additional products, creating what many call a “walled garden.” The depth and breadth of this moat make it difficult for competitors to lure customers away, allowing Apple to maintain high profitability over time.

Strong economic moats make it easier to predict a company’s future earnings, which improves the reliability of intrinsic value estimates

Patience and Emotional Control: The Quiet Advantage of Long-Term Investing

One of the key principles of successful investing isn’t found in spreadsheets or formulas - it’s temperament. Markets move every day, and headlines can shift sentiment almost hourly. Those swings can push stock prices up or down rapidly, but the underlying value of a strong business rarely changes that quickly. The ability to stay calm when others panic, and to remain disciplined when others are euphoric, is a quiet but powerful advantage.

A long-term mindset means seeing volatility as a feature, not a flaw. Short-term price swings reflect fear, excitement, and uncertainty more than they reflect business fundamentals. Investors who react emotionally often buy when optimism is high and sell when fear peaks, locking in poor results. Those who remain patient allow time to work in their favor, letting strong businesses compound and temporary problems resolve.

Focusing on short-term noise leaves little room to evaluate real data and signals. Decisions based on a five-minute chart matter little if your investing horizon spans months, years, or even decades. In the end, patience is not passive - it is an active choice. It is the decision to stick with a well-thought-out plan, judge outcomes over years rather than weeks, and trust the process even when it feels uncomfortable. In a world obsessed with speed and instant results, emotional control and long-term thinking remain among the most undervalued advantages an investor can have.

Up next — Chapter Four:
In the next chapter, we’ll explore how to spot undervalued stocks using simple screening methods like P/E, P/B, EV/EBITDA, and free cash flow yield. You’ll also see the tools I use and a mini-case study — why I once considered Pinterest undervalued. If you want practical ways to find value stocks, this chapter will show you how.

To Be Continued

This was Chapter Three of the Value Investing Guide.
If you haven’t read Chapter Two, click the button below to learn about origins of Value Investing

Or, if you want to start from the beginning here's a place to start: Investing with Reason: How Engineering Led Me to Value Investing