Too much of anything is bad for you: Cream sauces, Elvis tribute weekends, and investment articles about risk assessment. Think of value investing as Risk Lite.  All of the profitability with about half of the head-spinning technical analysis, without sacrificing the full-bodied profit-taking of a really good stock pick.

All stock prices are like the Apollo spacecraft orbiting the earth: They revolve around the underlying fair market value of the company. Investment gravity holds them to their fair market value. If the price of a stock goes to too high  beyond its fair market value,  profit-taking pulls it back.  Bad news hits the company, and the stock gyrates down below its fair market value. As signs of improvement or correction of whatever conditions drove the stock price down occur, the stock moves back towards or over fair market.

Value investors buy on the down side, and use the slingshot effect of the financial atmosphere to let gravity propel them to some very nice profits. 

All companies, even the biggest and best in any industry, hit periods of bad news.  At these times of bad news, the technocrats and the market momentum movers are going to see these stocks as "high risk" and avoid them.  That's good news for you, because your viewpoint is a bit bigger and longer term than the day to 18 month window held by these other investment philosophies that drive the stock markets.

To assess risk in a Value investing model as the average Joe, you need to do your homework. Research your stock buys, and ask yourself these questions:

• Is the company going to go out of business or be irreparably damaged long-term as a result of this bad news? This eliminates a lot of small and medium sized stocks that are vulnerable to being wiped out by adverse market conditions. Is a company as big as Fannie Mae going out of business? Citibank? Possible, but unlikely under the current or near-term conditions of the marketplace. On the other hand, Kodak not extending its photo dominance early in the digital era allowed HP and others to permanently damage the company's place in the market.  If you can see a day when General Motors is a division of Toyota because it cannot maintain or capitalize on its place in its industry, then you may want to pass on the stock.
  
  
• Will the marketplace be greatly impacted by significant damage to the company? Countrywide writes 1 in 5 home loans. If they tank, will that affect the stability of the entire banking/mortgage/financial market?  Will large market forces, the government, other businesses in the industry, etc. rally to relieve market pressures to avoid such a change in condition for one or more of these super-players?
  
  
• Is the adverse condition long-term or short-term?  Is it organic to a business or is it man-made? The housing slump is cyclical. If you have two to six years to run the stock, it may well reward your patience, if you pick the right stock, and the company is positioned to ride out the market conditions. A CEO makes a bad bet on an investment, a-la Merrill Lynch.  Is this a long-term problem, or will it clear up with a change of CEO and write-offs of bad debt?
  
  
• Is the stock priced fairly for the bad news?  Just as there is irrational optimism for some stocks, there is equally irrational pessimism. Xerox, Fannie Mae and Countrywide, have all received punishing drops in their stock prices that took them to levels well below even the most generously discounted fair market value and were over-corrections for their bad news. Krispy-Kreme, however, tanked and tanked further on news of their shoddy bookkeeping. That was a fair punishment for a stock of a company in disarray.
  
  
• Has fair market value been compromised?  Some stocks trade down on bad news that materially affects their fair market value. Fear of changes causes others to go down without there really being much change to the company's "real" worth. Some bleed out fair market value over time.  You have to figure out whether the bad news is cyclical, like the corrections in housing prices, or long-term, like the publishing business where newspaper companies that aren't adapting to the digital age are finding their future worth reduced by the increased competition from companies that weren't there ten years ago.
  
  
• What is the time window of the conditions that increase risk and decrease price? Even expensive mistakes by firms are recoverable. Granted, a company like Merrill may not hit the stock highs that it has seen in recent years, but can you make money on the stock when it gyrates back over fair market value? If the conditions are expected to clear within a year, or several years, that will determine the fit in your portfolio.
  

When you buy a stock that is discounted 15 to 17% below fair market or more, you are buying insulation against the current raft of bad news, and buying into the upward gravitational pull of a value stock purchase.

Unless you are the Amazing Creskin, your ability to read the exact time to buy on the value side of a stock's orbit is going to come largely from the experience of doing it. If you can afford to buy in smaller lots of a hundred up to a few thousand shares, you put in a stake where you see a good deal on the price.  You might buy a bit more if the stock cycles down further, but never chase the stock after it has left the price range that you want to buy it in.  When a company's stock is looked upon negatively, the curve down is as bumpy as the curve up. There usually are other opportunities.

Value stocks have reduced real "risk" because the negatives are already known and have largely happened:  Stocks that already have had the snot knocked out of them by the market generally tend to already have the risk priced into them. Other market corrections or sector price swings don't tend to affect them as severely because the bad news scenarios are already priced into the stock's value. 

There are still surprises in some cases.

Fannie Mae had more accounting problems than were first known when the stock took round one of hits.  Still, as a cornerstone financial institution, it has the staying power to survive, and its connections to the government have helped the stock heal a bit faster than if it had been a fully private company.

Krispy Kreme, the darling of wall street and expanding wastelines everywhere, was hit by the diet police and then body-slammed by their in-house accounting problems and problems with their franchising schemes. Knowing more about the particulars of every stock that you invest in is good advice. Morningstar's reports are a good information source.

All market conditions favor value plays. Bull market or bear market, what does it matter to you?  Fed rate cut or junk mortgage burp?  Oh well. On any given day, there is good news, and there is bad news.  You are a bad news vulture. You pick out the good meat from the bad, and feast on that. Value stocks are highly anti-cyclical. When a stock gets dinged for performance problems or missing a target, it moves, for a time, into its own orbit. Value investors make money when the market is bad, or when it is good, because there will always be some meaty stock that enters the investment grave yard that makes someone else's soup for the day.

All market sectors fall into the value play at one time or another. It could be banks or precious metals, telecommunications, or media.  Selecting the strongest companies with the best chances to build or rebuild offers you the highest returns.

Buying on value usually locks in a gain.  If you are buying at a 17% discount to fair market value of a stock, for example, then your expectation is that you will see at least a return to fair market, or the 17%. 17% return consistently is a very credible thing. As the guys on late night QVC say, though: "That's not all!" You can see gains of 50%, 80%, 100%, 200% and 300% as the company rebounds from the conditions that set it back, particularly if you continue to just hold a great company over time and let it make money.  Those of you who bought Apple during the days when CNBC was pronouncing its doom over and over again, in spite of the $5 Billion cash float that the company held, are looking pretty smart having bought it at $6 or $7 now that it is a $170 stock. While not all examples are that extreme, if you bought a Fannie in the 40s and it goes into the 80's you've doubled your money.

How you pick those stocks will be the topic of another part of the guide. Going to the Elvis thing and eating too much Fettucine Alfredo... that's your call.