A Value Stock is one that was vetted through the process of Equity Research to provide adequate Margin of Safety. The goal of equity research is to estimate the intrinsic value of a stock. As illustrated in the chart, the difference between intrinsic value and the purchase price of a stock drives Margin of Safety. Accordingly, for a given intrinsic value estimate, the lower the purchase price of the stock, the higher the Margin of Safety.
I have found that people ask about stocks before they ask about companies, business models or technologies. People also complain about “value-traps” without really having a clear definition of what “value” really means or how it is generated. One way to avoid value-traps is by following a disciplined process for assessing Margin of Safety, as described in my book. Of course, estimating Margin of Safety requires a lot of work, which is called Equity Research. The chart below illustrates this important relationship.
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