Value investing is neither about buying and selling pieces of paper nor about making market predictions. Instead, value managers usually focus on quality companies that are trading at a discount to business value.

Despite talk about a New Economy, value investors typically believe the fundamental rules of economics have not changed and that, ultimately, a company's value must justify its stock price. The momentum of the stock price does not usually concern a value investor as much as how that stock price relates to the value of the business.

How do stocks become undervalued? Stocks become undervalued for a variety of reasons, such as an overall market decline or when a specific industry falls out of favor. When these situations occur, a company's stock price may fall, even though its underlying value remains unchanged. When modest or even significant changes occur in an industry, opportunities are created for investors to pick up bargains amidst general anxiety over the future.

Value as a Core Holding
At Oakmark, we believe this style of investing is an appropriate core holding for a portfolio. All of our Funds use the same value investing approach because we believe, over time, it is the best way to provide profit potential while reducing risk.

Value in an Asset Allocation Strategy
An asset allocation investment strategy advocates building a well-diversified portfolio amongst different investment styles and vehicles on the assumption that the market is cyclical. While one investment philosophy may be successful for a period, a different style may not. In this view of the market, value investing is often contrasted with growth investing. While value investors focus on the value of a company in comparison to its stock price, growth investors usually emphasize a company's growth rate, expecting the high rates of growth will continue and thereby deliver superior returns.

Value funds and growth funds rarely buy the same stocks at the same time, so a portfolio containing both kinds of funds should have little overlap. Therefore, our value approach makes The Oakmark Funds an excellent component of a diversified portfolio.

Shareholders who choose our Funds for an asset allocation strategy or as a core holding depend on us to adhere to our philosophy. If we switched investing styles in the hope of following the trends, we would do a disservice to our investors. Oakmark is renowned for its commitment to value investing.

Next: Value & Your Portfolio