Over the long run, the primary driver of a stock's market value appreciation is the growth in its underlying intrinsic value, specifically its earnings per share (EPS). This simple but profound concept grounds investing in business fundamentals, treating stocks as ownership stakes rather than speculative tickers.

Counter to conventional value investing wisdom, a low Price-to-Earnings (P/E) ratio is often a "value trap" that exists for a valid, negative reason. A high P/E, conversely, is a more reliable indicator that a stock may be overvalued and worth selling. This suggests avoiding cheap stocks is more important than simply finding them.

Identifying a stock trading below its intrinsic value is only the first step. To avoid "value traps" (stocks that stay cheap forever), investors must also identify a specific catalyst that will unlock its value over a reasonable timeframe, typically 2-4 years.

Traditional valuation metrics ignore the most critical drivers of success: leadership, brand, and culture. These unquantifiable assets are not on the balance sheet, causing the best companies to appear perpetually overvalued to conventional analysts. This perceived mispricing creates the investment opportunity.

Intrinsic value shouldn't be confused with a 12-month price target. It is a calculation of a company's long-term worth, akin to a private market or takeover value. This stable anchor allows investors to assess the "margin of safety" at any given market price and ignore daily noise, rather than chasing a specific trading level.

Traditional valuation multiples are increasingly misleading because GAAP rules expense intangible investments (R&D, brand building) rather than capitalizing them. For a company like Microsoft, properly capitalizing these investments can drop its P/E ratio from 35 to 30, revealing a more attractive valuation.

Financial models struggle to project sustained high growth rates (>30% YoY). Analysts naturally revert to the mean, causing them to undervalue companies that defy this and maintain high growth for years, creating an opportunity for investors who spot this persistence.

The best investment deals are not deeply discounted, low-quality items like "unsellable teal crocodile loafers." Instead, they are the rare, high-quality assets that seldom come on sale. For investors, the key is to have the conviction and preparedness to act decisively when these infrequent opportunities appear.

Contrary to Modern Portfolio Theory, which links higher returns to higher risk (volatility), Buffett's approach demonstrates an inverse relationship at the point of purchase. The greater the discount to a company's intrinsic value, the lower the risk of permanent loss and the higher the potential for returns. Risk and reward are not a trade-off but are both improved by a cheaper price.