“Auction-driven markets have this nuance where they either get euphoric or pessimistic, and they might do both in the same year. That’s what leads to distortions and mispricing, and that’s what we can take advantage of.”
Mohnish Pabrai
Value investing is usually focused on publicly traded stocks. There are a few reasons for this.
The asset class of public company stocks has historically outperformed other asset classes like bonds or commodities. The S&P 500 index (which tracks the stock price performance of the largest listed companies in the US) has in the average returned more than 10% per year in the last 50 years: we have already discussed about the power of long term compounding and so you can appreciate the importance of such a performance.
In addition to that, stock exchanges are auction-driven markets subject to boom-and-bust cycles. It means that these markets are subject to the impact of human psychology, and so stocks are often increasing in price during euphoric periods and heavily decreasing in price when pessimism is dominant. Just think of it as if a manic-depressive person called Mr Market would offer to sell you a stock for a very low price in a pessimistic day, while coming back to you the next day in an euphoric mood offering to buy from you the same stock of the previous day for a much higher price: this is the brilliant allegory used by Ben Graham, the “father” of value investing, to describe the irrationality of stock markets.
A good value investor is aware of the average long-term positive performance of publicly traded stocks and can obtain even better results than average, if able to use the irrationality of markets at his or her advantage in spite of surrendering to human cognitive biases.
Wise Value Investing 