A value investor always looks for stocks available at a throwaway price, thus buying at a 'margin of safety'. This concept central to the discipline of value was pioneered by the father of value investing, Benjamin Graham.

The concept has been so important for the Warren Buffett that he remarked, "The three most important words in investing are 'margin of safety', which means always building a 15,000 pound bridge if you're going to be driving 10,000 pound trucks across it."

Graham was the first person to realize that the basic truth about stock market investing is the price; you should pay considerably less that the real worth of share when you buy a share.

The price of a share keeps hovering around its intrinsic value, at times the price would rise much higher than its value, and at times, the price would plummet to a ridiculously low figure. If the price falls, sooner or later the market is bound to realize that the share is a bargain, and this would bring the price close to its intrinsic value, sometimes the momentum, may take it further up.

The real skill of an investor lies in finding the stocks that are selling much below their real worth, thus creating a 'margin of safety' for the investor.

'Parable of fictitious Mr Market'

Graham would explain this concept in his lectures by telling the parable of a fictitious Mr Market.

Mr Market is a whimsical character. He keeps approaching you everyday, and keeps quoting the prices of shares you own or intend to buy (With the live quotations ticking on your computer screen, Mr Market actually keeps quoting prices every moment).

Even if the company may have a very stable business, unfortunately the quotations of Mr Market are anything but stable. He has severe emotional problems, at times he becomes euphoric and can see only favourable factors affecting company.

In that mood, he quotes a very high price. At times, his mood is very depressed, and he is pessimistic about the shares. He quotes a ridiculously low figure when in a bad mood, thinking that the sky is going to fall.

The more manic-depressive his behaviour is, the better it is for you since you can find a great bargain.

One good thing about Mr Market is that he does not mind being ignored. His job is to quote the prices, to buy or not to buy is purely your decision. If he shows up one day in a very foolish mood, you would do well to take advantage of him, but it could be disastrous for you if you succumb to his influence.

In order to strike the right deal, you should be better in the art of valuation than Mr Market. If you can't understand the business better than Mr Market, please don't play the game.