(Excerpt from Staring into the Valuation Abyss)
I think there is a lot of confusion out there about what Value investing is. Lots of people seem to think it’s about buying really crappy companies for low multiples. This misconception has been amplified by academics who categorize low multiple stocks as “value” and then run all types of studies on them (nothing irritates me more…but maybe we can explore that concept in a later post). Low multiples are not really the definition of value investing, the real definition is to identify situations in which the ODDS of success are MISPRICED by the market. This can happen with a growth stock, it can happen with a cheap stock, it can happen with the bonds of a bankrupt company, it can happen in a lot of scenarios.