Value investing is based on the belief that there is an objective, determinable value for any investment, which is independent of the stockmarket. This is known as intrinsic value.

From a value investing perspective, intrinsic value is defined 'as the discounted present value of all cash that can be taken out of a business during its remaining life'.

The power of this simple formula must not be underestimated. It effectively allows all investments – be they shares, property or fixed-interest to be reduced to a common valuation base.

Value investors use government bonds as this common valuation base. After all, why invest in something if its return is not at least equal to that of government bonds?

This effectively means that we look upon, and value stocks, as though they were bonds, with a variable interest rate. Those companies offering the greatest returns are the ones in which we invest.

At Gavin Ross & Co, we will never pay more than the intrinsic (or true) value for an investment. Preferably, we will only invest in companies that are trading at a discount to their intrinsic value in order to provide our clients with an acceptable margin of safety.

All this is in defiance of conventional investment wisdom – the so-called efficient market hypothesis – which holds that, at any one point in time, the price of a stock is an accurate reflection of its intrinsic value. Indeed, it is by exploiting the difference between market price and intrinsic value that we make the greatest gain.