Value investors hold to some basic tenets: Price is what you pay, value is what you get; the risk in investing is the risk of paying too much; beware of paying too much for speculative growth; separate what you know from speculation, and anchor on what you know.  

Distinguishing between price and value is common sense. But the identification of "intrinsic value" is not straightforward, and there's the rub. The rough idea is to establish value from the "fundamentals," usually involving some accounting information. In this article, I'd like to share some ideas about valuation and in particular about handling accounting in valuation. Most of these ideas are from my recent book, Accounting for Value.

Valuation is often seen through the lens of a valuation model, such as the discounted cash flow model. In my view, valuation models are not much use. They require one to specify both a "cost of capital" and a "long-term growth rate." Despite many years of working on the problem, modern finance does not have a good handle on the "cost of capital." It is very much a guess.