An important attribute shared by most value investing approaches is the rational perspective of taking a long-term view. This is critically important, because it is all too common that undervalued common stock investments do not tend to perform well over the short run. This is simply because, as a general rule, you will not find undervalued investment opportunities in popular stocks (companies). Common sense dictates that stocks only tend to become undervalued when they are simultaneously unpopular, at least temporarily. It is generally this unpopularity that creates the short-term discrepancy between fundamental value and stock price.
However, the greatest success derived from value investing happens
when the company’s stock price is dropping even when the fundamentals of
the company continue to remain strong. Therefore, the key to
implementing a profitable value investing transaction is to learn to
focus on and trust the fundamentals supporting the business. In the same
context, this also means adopting the conviction to not trust, and even
the willingness to ignore poor short-term price action. Accomplished
value investors understand that stock prices can lie, at least over the
short run. But more importantly, accomplished value investors also
understand that in the long run, fundamentals matter most.
Consequently, successful value investing requires a level of patience
that unfortunately many short-term oriented investors do not possess.
However, the rewards from investing in a truly undervalued stock can
produce powerful long-term returns for the rational value investor who
is capable of engaging in intelligent patience. But even better yet,
those powerful long-term returns are generated at reduced levels of risk
relative to other common stock investing strategies.
-- Chuck Carnevale