The simple answer is that value is hard to define, but you know it when you see it. Basically, all great investments start with buying something for less than it's worth. Conventionally, value is measured in quantitative terms—by price-to-earnings, price-to-book and price-to-some other accounting metric—but there are problems with defining it that way, and one is the accounting numbers themselves. I have found, as have many investors before me, that accounting numbers are not a useful way to value a business. They are usually manipulated because they are subject to the opinions and whims of the person preparing the statements. Plus, instinct and creativity can't be measured that way. There's some judgment involved that goes beyond the math. I'm called a value investor, but was Google a growth stock or a value stock at $480 per share when I bought it? What I know is that it's a great opportunity for my shareholders and I'll let someone else define it.
The second reason why those numbers aren't useful is the market itself. For example, Lehman Brothers went bankrupt with all-time record earnings, a high P/E and a high price-to-book ratio. When the market is doing well, everyone justifies a high P/E, and when it's not, the metrics become more conservative. There is a lot of market exuberance in terms of what's the right P/E for a business, and I don't like that.
When I think about value, I keep it simple. I ask, 'What would I pay if I bought the whole business myself?' I usually come up with a much more conservative and durable number. I take the market's mood and accountants' whims out of the equation, because the real number is based on cash flow. Operating cash flow is a direct window into the heart and soul of a business, and if you know what to look for, you can get a good sense of whether good things are happening or not.
And then from there, you have to make some allowance for whether the balance sheet is good enough and from there you go to the four questions that I think are the four most important questions and maybe even the only four questions that matter to any potential investment.