There was a time, not too long ago, when it was possible to identify a seriously under-valued asset, buy it and move it on rapidly for a profit.

Alternatively, one could (and still can) buy forms of this particular asset, improve its overall look and important internal features before selling it on and recording a profit, though margins have narrowed markedly and the ability to speculate on banking a decent return have been further undermined by the reluctance of lenders to finance such undertakings.

The asset referred to above is, of course, property, although over the past 20 years, it has become incredibly difficult to find under-valued residential real estate, not least because vendors are acutely aware of the market value of such assets, usually to within £2.50.

Nonetheless, opportunities to trade cheap-looking property currently abound, provided investors are prepared to accept the significant risks associated with commercial property (not least its location), the value of which has taken an almighty hammering since 2007.

The considerable risk of moving lock, stock and barrel into commercial property and taking advantage of these opportunities is further compounded by the fact that few property professionals are prepared to call the bottom of the market, a feature which continues to depress valuations.

In many respects, similar problems continue to attach themselves to equity investment, an area where risk levels remain high, although it is still possible to become a shareholder in a company whose intrinsic net asset value is considerably greater than its share price.

The benefit of buying anything at a price below its intrinsic value goes without saying — such a transaction creates a margin of safety and, hopefully, also accounts for the inherent risk associated with holding a stock that might currently be out of favour with investors.

In their seminal work, Security Analysis, published in 1934, Benjamin Graham and David Dodd first noted the link between intrinsic value and risk.

Consequently, they maintained that an understanding of a company’s balance sheet was pivotal to investment success. Bear in mind they were writing at a time when the economy and businesses were operating under severely depressed conditions, the relevance of which will not be lost on today’s investors.

Graham and Dodd advised investors to examine the balance sheet in detail in order to establish a company’s liquidation value. For the sake of argument, this entails valuing its current assets less current liabilities.

The logic was simple enough: if a company could be bought at a price below its liquidation value, then there seemed little doubt the investor had bagged a bargain.

Furthermore, if trading conditions or management improved to the point where the company’s shares rose in value (the longer-term aim of value investing), then everything would be hunky-dory.

If, however, conditions continued to deteriorate and there was no uplift in company earnings, it was theoretically possible that it could be liquidated and the proceeds distributed amongst shareholders.

Of course, this is a gross simplification (as former holders of Marconi stock, including yours truly, would acknowledge with considerable pain), but in either case, shareholders who managed to buy below liquidation value would be showing a profit rather than nursing a loss.

Buying shares at below their intrinsic value is not easy — the investor must have a good (and quantifiable) idea of what its assets are worth and the rapidity with which they could be realised.

But as a start point for the process known as ‘value investing’, understanding this basic principle ensures the investor gives himself an excellent chance of realising a profit at some undefined point in the future.