All in one ( graph )

Yesterday, I had the pleasure of speaking about value investing at a conference organized by Investas (the Luxembourg association of private investors - www.investas.lu ), together with the Goldbridge Investment Club — Luxembourg’s fully student-driven investment club ( www.goldbridge.lu ). One slide captured the core idea particularly well: value investing is, at heart, a fundamental arbitrage. For quality businesses, intrinsic value tends to compound over time as the company builds earning power. The market price, however, is driven by short-term noise and the mood swings of “Mr. Market” — a voting machine that rarely sits exactly on intrinsic value.

From time to time, the price falls to a level that implies a meaningful discount to intrinsic value — what value investors call a margin of safety. That is when we aim to buy a wonderful business at a depressed valuation. We then remain patient until that margin of safety closes. Over the long run, this gap — bought cheaply and normalized over time — becomes an important source of return.

This is the discipline we apply every day in our European Value Fund at ECP.