Lakonishok Screen

Value investing consists of buying unappreciated or ignored stocks at attractive prices. Value investors seek stocks that are priced attractively relative to some measure of intrinsic worth-for instance, they look for stocks selling at temporarily low multiples of price relative to book value, cash flow, earnings, or sales. The idea is that, while these stocks may have fallen off of Wall Street's radar screen, eventually the market will realize the worth in these firms and prices will rise.

Historically, this strategy has outperformed the more glamorous growth investment approach. Perhaps more telling, this strategy also outperforms the market as a whole over the long haul.

The tenets of value investing are found in Benjamin Graham and David Dodd's book "Security Analysis," first published in 1934. In 1949, Graham published another book, "The Intelligent Investor," in which he honed his value message for the individual investor. Graham advocated in-depth company and industry analysis in an attempt to uncover sound, growing businesses selling for 50 cents on the dollar.

Over the years, the value torch has been successfully carried by others. In the book "Investment Titans" (McGraw-Hill 2001), Jonathan Burton talks with another value investor who made a name for himself, first in the realm of academia and then in the investment management arena—Josef Lakonishok.

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