by dhirendra kumarthe word value is now so overused that it has almost become an example of the worst kind of corporatese language especially the phrase adding value this is unfortunate since this word has a precise meaning in investing it has a history a method welldefined goals and a tremendous track recordpeoples instincts about what makes a purchase worthwhile has some harmful side effects when applied to investing however overcoming these instincts can be very profitable which is what value investing istwo contradictory instincts define how people spend their money one is to buy expensive things in order to signal their wealth and status and the other is to get a good bargain ideally one would want both to be present together in any proposition we would like status symbol possessions that normally cost a lot but we would want to get them at a good bargain just for us that sounds like an impossibly good deal but then the fun of getting a deal is the maximum when its goodits a natural technique to use the price of something to judge its intrinsic value people express their wealth and their status in society by buying things that are more expensive whether its something trivial like a pair of socks or some large expense like a car or even a house rich people spend more on the same kind of things this behaviour is a part of human nature and really theres nothing fundamentally wrong with it people acquire wealth to signal status and it brings them a feeling of fulfilment to be able to do sohowever this belief that expensive things are better shapes human behaviour in some surprising ways the strangest example that i have found is that in drug testing patients have been observed to improve more if they are told that the medicine that they are being given is more expensive it sounds unbelievable but the same medicine has a more beneficial effect on disease if the patient believes that its more expensive this means that although we tend to instinctively look for bargains we dont always make correct judgements about the value of things instead we use price itself as an input to determine whether something is a good bargain this sounds like circular logic and it isso if this is an element of human nature then what is its effect on investing the more a stock rises the more people believe instinctively that there must be something good about it in a sense the cause and effect is reversed at its heart value investing is the style of investing that does the oppositethere are a variety of ways of defining value investing but they all boil down to the fairly simple concept of buying quality stocks that are undervalued its about buying cheap and about being aware and even suspicious of the idea that if something is expensive then it must be good investing in a stock is an exercise in accepting uncertainty