Showing posts with label value investing. Show all posts
Showing posts with label value investing. Show all posts

The History and Rebirth of Growth Stocks Investing.


By BetterInvesting On April 5, 2012 ·

The editorial of the January issue of BetterInvesting Magazine features a letter from Ted Brooks of North Carolina, who provides a brief history of growth stock investing and the important role BetterInvesting co-founder George Nicholson played in popularizing this investing philosophy. In 1940, when Nicholson was just beginning his “bold experiment” of helping individual investors form investment clubs to pool resources and analyze stocks, growth stock investing was no longer in vogue, replaced by Benjamin Graham’s value approach in light of the 1929 crash.

January 2012 vol 61, No. 5 BetterInvesting Magazine

Reader’s Letter Provides Context for the SSG (The Stock Selection Guide)
In investing circles we tend to take some ideas for granted. In August 2005 we published an article discussing the history of growth stock investing. But a recent letter from reader Ted Brooks of North Carolina, spurred by our article on Better¬Investing’s 60th anniversary in the November issue, provides an excellent history lesson. Below is his letter, edited for Associated Press style and length.

When the Dow Jones industrial average was introduced on May 26, 1896, the world of common stocks was beginning to evolve into three distinct categories: railroads, public utilities and “industrials” (everything else). It is important to note that the “industrial” common stocks were not considered an appropriate investment vehicle for the prudent investor at that time; such investors would limit their holdings to bonds, preferred stock and perhaps an occasional railroad or public utility common stock. This attitude prevailed until around World War I.

While eschewing common stock for bonds and preferred stock sounds strange to our ears, it was not without justification. The DJIA started off as an arithmetic average of the stocks’ closing prices. In other words, the average price of stocks in the DJIA initially bounced between about $40 and $80 and did not break $100 until 1906. What few people realize is that prior to 1915, common stock prices were quoted as a percentage of par value (like bonds and preferreds), and par value was typically $100. If these sound like “junk bond” prices to you — you’re right!

During this period, value investing — focusing on dividend yields, low P/E and discount to book value — prevailed. These concepts carried over readily from the realm of bond and preferred stock analysis.

The man generally credited with introducing the concept of growth stock investing is Edgar Lawrence Smith. Smith’s book, Common Stocks as Long Term Investments, stated that common stocks had a history of outperforming bonds under all economic conditions, going back at least to the end of the Civil War. Now, in early 1925, both the book’s title and theme were outrageous statements that flew in the face of all prevailing logic — something present-day investors do not fully appreciate. Unfortunately, Smith’s book and ideas would see a meteoric rise and fall. …In the first edition of Security Analysis (c. 1934), Benjamin Graham wrote a harsh criticism of Smith and his “growth stock” ¬disciples, and he urged investors to go back to the old rules of valuation that were discarded as obsolete during the bubble (leading to the 1929 crash).…

Against this backdrop, it is easier to understand George Nicholson’s courage in proposing the idea of investment clubs in 1940. Individual investors analyzing stocks? Buying growth stocks? George, where have you been for the last decade — living under a rock?

The BetterInvesting principles of demanding consistent growth in sales and earnings over a period of five-10 years, stable or increasing profit margins and closely watching valuations did not come out of thin air. They all came out of the hard lessons learned in the late 1920s when they were disregarded (as they were during the tech and dot-com bubble of the late 1990s). Nicholson recognized that focusing on these aspects — together with a graphical representation known as the SSG — allowed new investors to gain experience without wading into the trickier aspects of differentiating between a “value play” and a “value trap.” Nicholson’s “bold experiment” required a leader possessing both courage and clear thinking to make it reality in that historical context. I think all of these things combine to make Nicholson’s legacy what it is.

http://blog.betterinvesting.org/investing/the-rebirth-of-growth-stocks/

7 Stock Investing Advices Warren Buffet Want You to Know

Good Stock Investing Advices

That All Beginners Need to Follow Religiously

Summarized Overview

In this article, you’ll find information on the stock investing ideas that Warren Buffet wants all stock investors to know, strategy he uses to maximise return, price of stocks that he willing to pay, key financial ratio that is so important to him, type of managers he loves, and kind of management he trusts.

7 Stock Investing Advices for Beginners

This stock market investing advice will help you on how to pick stocks Warren Buffet way.


Stock Investing Advices #1: Simple Business Model
It is not just about simplicity, but also something that you can understand. You must clearly define your circle of competence and stay where you are. It can be something that you learn while you are working or something that you spend time on to understand the business operation. To most, oil and gas business can be seen as so simple and yet very profitable, but to those who works in that industry will tell you, it is not as easy as what you think.  Do you know why this is so important?

When come to investing, predicting what will happen tomorrow is something that you can’t live without. Forecasting what the future will be is the only way you can estimate how much return you’ll be getting later on. So, if you really understand the business inside out, you can project how the company perform 30 years down the road; take into consideration the national economy, competition from others and change in customers’ lifestyle.

Stock Investing Advices #2: Wide Economic Moat
Simply said, the company should serve valuable niche market with price inelastic products or services. Warren Buffet himself avoids regulated industries, commodity businesses as well as capital intensive industries. 

He prefers stocks which can finance their capital from operating cash flow with less borrowing as well as has strong pricing power. Meaning, the company can price their products as much as they want. That is why, Warren Buffet love ‘franchise’, for example, Furniture Mart (the lowest cost in the industry), The Washington Post (market dominance and leader), Coke (strong brand name) and Candies (premium priced and high quality products that serve niche market).

Stock Investing Advices #3: Sustainable Growth
Serving the existing niche market is not enough. Instead, Warren Buffet wants the company to grow continuously and exponentially. Therefore, he looks for managements that have the ability to widen their economic moat consistently over the past years. Their businesses must be positioned where the demand able to grow continuously; Gillette is his best example. In the same time, always be ready for any possible trouble to the business, and most importantly back up your investment plan!

Stock Investing Advices #4: Excellent Capital Management
Every company that is listed in the stock market were entrusted to manage the business on behalf of their shareholders. Therefore, it is the managements’ duty to utilise the available resources for the highest possible return. To do this, they have to think and act like an owner and avoid the ‘institutional imperative’ style of management (think for themselves and don’t care what will happen 20 years down the road). When they don’t have the capability to create at least $1 value from $1 reinvestment, they should return the capital back to the shareholders by giving dividends or share buybacks.

Stock Investing Advices #5: Effective Management Team
Invest in company that have honest and capable managers. They should be so capable that Warren Buffet himself admires the way the managers do things. In Berkshire Hathaway Annual Meeting year 2000, he once said, “we want managers who tell the truth and tell themselves the truth, which is more important”. He loves cost conscious and frugal type of managers who are honest and integrity as well.

Stock Investing Advices #6: Superior ROE
Why ROE, and not the other financial ratios? Well, return on equity indicates how effective the management team convert the reinvested money into cash. The higher the return, the more profitably the company can reinvest its earnings. The faster the company able to turn the reinvested earnings into profits, the faster its value increases from one year to another. And mind you, it is a big challenge to the management to consistently create value for every penny they spend. To prove this, not many stocks that has 15 per cent ROE consistently for the past 20 or 30 years, worldwide.

Stock Investing Advices #7: Buy at Discount Price
Once the good stocks have been identified, now is the time to buy them. To make sure every $1 investment will generate $2000 in just 30 years, Warren Buffet have to make sure he buys the stock at the lowest price possible. In the same time, he has to be real that not to set very low price till he misses the golden opportunity. Thus, he keeps himself buying the stocks when the prices are offered at pre-determined margin of safety. The margin of safety can be as low as 80 per cent discount from the calculated intrinsic value. Even if the stocks are so profitable but the price is too high, he will just passes the opportunity to somebody else.  

If you want to be as successful as Warren Buffet in stock investing, study each point thoroughly. Ignoring either one advice is enough to make you broke in stock market; simply because, in stock investing, due diligence counts. Intentionally not following the advice proves that you are not ready for investing; perhaps you are just looking for fast cash.



http://www.stock-investment-made-easy.com/stock-investing-advices.html

Value Investing - One of the best known stock-picking methods. Find companies trading below their inherent worth.

 Value Investment  


Value investing is one of the best known stock-picking methods. The concept is  simple: find companies trading below their inherent worth.

Benjamin Graham is considered the first proponent of value investing . He assumed that two values are attached to a company. The first is the market price, the value of the company on the stock exchange. The second is a company’s business value.

Business value or intrinsic value is based on its ‘real time’ value in the event of a merger with a competitor or in a takeover situation. Alternatively the owners may consider the business value as the amount that could be achieved by breaking up the company and selling all its assets.

The value investor looks for bargain price stocks: stocks selling at a low price but with strong fundamentals - including earnings, dividends, book value, and cash flow. Companies that are undervalued by the market have the potential to increase in share price when the market corrects itself.

Value investing doesn't mean just buying any stock that declines and therefore seems "cheap" in price. Value investors have to do their homework and be confident that they are picking a company that is cheap given its high quality. It's important to distinguish the difference between a value company and a company that simply has a declining price. For example, in the past year Company A has been trading at about $25 per share but suddenly drops to $10 per share. This does not automatically mean that the company is selling at a bargain. All we know is that the company is less expensive now than it was last year. The drop in price could be a result of the market responding to a fundamental problem in the company. To be a real bargain, this company must have fundamentals healthy enough to imply it is worth more than $10 - value investing always compares current share price to intrinsic value not to historic share prices.

One of the greatest investors of all time, Warren Buffett, has proven that value investing can work: his value strategy took the stock of Berkshire Hathaway, his holding company, from $12 a share in 1967 to $70,900 in 2002. The company beat the S&P 500's performance by about 13.02% on average annually! Although Buffett does not strictly categorize himself as a value investor, many of his most successful investments were made on the basis of value investing principles.

We should emphasize that the value investing mentality sees a stock as the vehicle by which a person becomes an owner of a company - to a value investor profits are made by investing in quality companies, not by trading. Because their method is about determining the worth of the underlying asset, value investors pay no mind to the external factors affecting a company, such as market volatility or day-to-day price fluctuations. These factors are not inherent to the company, and therefore are not seen to have any effect on the value of the business.   In the long run, stock prices will reflect this business value, but in the short and medium term, market prices are often far above or below it. 






http://www.trade4rich.com/Value.html

Value Investing - Mr. Market

Mr. Market  


Benjamin Graham used an imaginary investor called Mr. Market to demonstrate his point that a wise investor chooses investments on their fundamental value rather than on the opinions of others or the direction of the markets.

Let's say you own a business and have a partner. His name is "Mr. Market." Your business is a good one. It has given you a high return on what you have invested in the business. The only problem is that your partner, Mr. Market, is kind of a strange dude. He's very emotional. Some days he's on a very euphoric high and other days he's very depressed.

Mr. Market has a curious habit. Every day he comes into the office and offers to sell you his share of the business or buy yours. However, because he is so moody, if he happens to be euphoric on a particular day, he wants a very high price for his share. On the other hand, if he's in one of his down moods, he's willing to sell out for a pittance.

The interesting thing about Mr. Market is that he doesn't seem to care whether or not you choose to buy his interest or sell yours. He doesn't get his feelings hurt. You can do whatever you want. It's completely up to you. He just keeps coming in the office every day, offering to buy or sell at wildly different prices. It's always the same good business it has always been. That doesn't change. It's just that, depending on his mood, some days Mr. Market is enthusiastic about the business and other days he's very pessimistic.

Since you know what the business is worth, you can just listen to Mr. Market's offer every day and decide if his offer is a good one or one you want to turn down. Even though Mr. Market's moods might be difficult to get used to, he's actually a great business partner to have.

That's exactly the way you should view the stock market. Choose your favorite business that happens to be one of the 10,000 or so publicly traded stocks. Look at the stock tables in the paper and notice the yearly high and low price for that stock. You'll find that there can be a dramatic difference between the high and the low during a single year. The business hasn't changed. It's just the mood of Mr. Market that changes.





http://www.trade4rich.com/Market.html

Value Investing - Margin of Safety

Safety Margin  


Consider a real-life example of a margin of safety. Say you're planning a pyrotechnics show, which will include flames and explosions. You have concluded with a high degree of certainty that it's perfectly safe to stand 100 feet from the center of the explosions. But to be absolutely sure no one gets hurt, you implement a margin of safety by setting up barriers 125 feet from the explosions.

This use of a margin of safety works similarly in value investing. It's simply the practice of leaving room for error in your calculations of intrinsic value. A value investor may be fairly confident that a company has an intrinsic value of $30 per share. But in case his or her calculations are a little too optimistic, he or she creates a margin of safety/error by using the $26 per share in their scenario analysis. The investor may find that at $15 the company is an attractive investment, or he or she may find that at $24, the company is not attractive enough. If the stock's intrinsic value is lower than the investor estimated, the margin of safety would help prevent this investor from paying too much for the stock.


http://www.trade4rich.com/SaftyMargin.html

Value Investing - Important Financial Ratios

Important Ratios

The following is a simple discussion for the most important ratios a value investor should consider: 1. PE ratio, 2. PEG ratio, 3. Net profit margin , 4. Return on assets (ROA) , 5. Return on Equity (ROE), 6. Debt/Equity Ratio , 7. Current Ratio.


1). PE Ratio (P/E) 

Price/earnings ratio is the most common measure of how expensive a stock is. The P/E ratio is equal to a stock's market capitalization divided by its after-tax earnings over a 12-month period, usually the trailing period but occasionally the current or forward period.

In ordinary periods, most stocks trade between a 10-25 P/E ratio. Stocks with higher forecast earnings growth will usually have a higher P/E, and those expected to have lower earnings growth will in most cases have a lower P/E. Peter Lynch thinks the P/E ratio of any company that's fairly priced will equal to its growth rate.

The bottom line on Price/earnings ratio for the best value stock is: PE Ratio < 20


2). PE Ratio To Growth Ratio (PEG)

The PEG ratio is a valuation metric for determining the relative trade-off between the price of a stock, the earnings generated per share (EPS), and the company's expected growth. PEG is equal to P/E ratio divided by EPS growth ratio .

In general, the P/E ratio is higher for a company with a higher growth rate. Thus using just the P/E ratio would make high-growth companies overvalued relative to others. It is assumed that by dividing the P/E ratio by the earnings growth rate, the resulting ratio is better for comparing companies with different growth rates.

The PEG ratio is considered to be a convenient approximation. It was popularized by Peter Lynch. He thinks a fairly valued company will have its PEG equal to 1. So a lower ratio is "better" (cheaper) and a higher ratio is "worse" (expensive).

The bottom line on PEG ratio for the best value stock is: PEG < 1.

3). Net Profit Margin 

Net profit margin is a key method of measuring profitability which is calculated as net income divided by revenues, or net profits divided by sales . It can be interpreted as the amount of money the company gets to keep for every dollar of revenue. A 20% profit margin, for example, means the company has a net income of $0.20 for each dollar of sales.

When a company has a high profit margin, it usually means that it also has one or more advantages over its competition. Companies with high net profit margins have better control over its costs compared to its competitors and have a bigger cushion to protect themselves during the hard times. Companies with low profit margins can get wiped out in a downturn.

The bottom line on net profit margin for the best value stock is: Net profit margin > 10%.

4). Return on Assets (ROA) 


ROA gives an idea as to how efficient management is at using its assets to generate earnings. An indicator of how profitable a company is relative to its total assets.

ROA for public companies can vary substantially and will be highly dependent on the industry. This is why when using ROA as a comparative measure, it is best to compare it against a company's previous ROA numbers or the ROA of a similar company.

For example, if one company has a net income of $1 million and total assets of $5 million, its ROA is 20%; however, if another company earns the same amount but has total assets of $10 million, it has an ROA of 10%. Based on this example, the first company is better at converting its investment into profit.

Management's most important job is to make wise choices in allocating its resources. Anybody can make a profit by throwing a ton of money at a problem, but very few managers excel at making large profits with little investment.

The bottom line on return on assets for the best value stock is: Return on assets > 10%.

5). Return on Equity (ROE) 

ROE is viewed as one of the most important financial ratios. It measures a firm's efficiency at generating profits from every dollar of net assets (assets minus liabilities), and shows how well a company uses investment dollars to generate earnings growth. ROE is equal to a fiscal year's net income divided by total equity .

Buffett always looks at ROE to see whether or not a company has consistently performed well in comparison to other companies in the same industry. Looking at the ROE in just the last year isn't enough. The investor should view the ROE from the past five to 10 years to get a good idea of historical performance.

The bottom line on Return on Equity for the best value stock is: Return on Equity > 15%.


6). Debt to Equity Ratio

The debt/equity ratio is a key characteristic Buffett considers carefully. Buffett prefers to see a small amount of debt so that earnings growth is being generated from shareholders' equity as opposed to borrowed money.

The debt/equity ratio is a measure of a company's financial leverage calculated by dividing its total liabilities by stockholders' equity. It indicates what proportion of equity and debt the company is using to finance its assets.

If a lot of debt is used to finance increased operations (high debt to equity), the company could potentially generate more earnings than it would have without this outside financing. If this were to increase earnings by a greater amount than the debt cost (interest), then the shareholders benefit as more earnings are being spread among the same amount of shareholders. However, the cost of this debt financing may outweigh the return that the company generates on the debt through investment and business activities and become too much for the company to handle. This can lead to bankruptcy, which would leave shareholders with nothing.

The bottom line on debt/equity ratio for the best value stock is: Debt/Equity Ratio < 1.

7). Current Ratio 

The ratio is mainly used to give an idea of the company's ability to pay back its short-term liabilities with its short-term assets (cash, inventory, receivables). The higher the current ratio, the more capable the company is of paying its obligations.

A ratio under 1 suggests that the company would be unable to pay off its obligations if they came due at that point. While this shows the company is not in good financial health, it does not necessarily mean that it will go bankrupt - as there are many ways to access financing - but it is definitely not a good sign.

The current ratio can give a sense of the efficiency of a company's operating cycle or its ability to turn its product into cash. Companies that have trouble getting paid on their receivables or have long inventory turnover can run into liquidity problems because they are unable to alleviate their obligations. Because business operations differ in each industry, it is always more useful to compare companies within the same industry.

The bottom line on current ratio for the best value stock is: Current Ratio > 1


http://www.trade4rich.com/Ratio.html

Value Investing - Stock Price

Stock Price  


You can’t buy any stock at any price, right? The price you pay is ultimately determines your rate of return. You want to buy cheap to maximize your earnings.

The actual stock prices consist of two parts: 1) intrinsic value and 2) variance from the human emotion and dynamic market environments. So there are two basic methods to determine the price of a stock: 1) Fundamental Analysis and 2) Technical Analysis.

  • Fundamental Analysis determines intrinsic stock prices by projecting future earnings and then applying an acceptable return on    investment to calculate the stock price. This approach is used by most traditional investment analysts.
  • Technical Analysis applies statistical charts and techniques to historical stock prices and volumes to identify the future stock price trend. It does not consider the fundamentals of the stock. The business, or economic environment as the influence of these factors is deemed to be already reflected in the stock price.


http://www.trade4rich.com/Price.html

Value Investing - Calculating Intrinsic Value

Calculating Intrinsic Value  


There are many ways to calculate the intrinsic value.  We'll just go over the most common used PE (Price to Earnings) stock valuation method to calculate the intrinsic value.   Price/earnings ratio is the most common measure of how expensive a stock is.

P/E ratio = P / EPS         P = Current Market Price,        EPS = Earnings per Share

The higher the P/E ratio, the more the market is willing to pay for each dollar of annual earnings. Companies that are currently unprofitable (that is, ones which have negative earnings) don't have a P/E ratio at all.  In general, the P/E ratio is higher for a company with a higher growth rate.Peter Lynch thinks the P/E ratio of any company that's fairly priced will equal to its growth rate.

If we know a stock  P/E ratio and its EPS, we can calculate its value by the following formula:      

Value = P/E * EPS

For example, if stock ABC  long term EPS growth rate is 15%; and next year EPS estimation is $1.8, we can suppose its next year fair PE equal to 15, and its next year’s fair value is 15 * 1.8 = 27. Now that you know what the stock is "worth", you can compare its current stock price with its value to decide if it is worth to buy, sell or hold. For example, if ABC was trading at $20, you would consider it undervalued because its trading at a price that is less than its value of $27. However, if it was trading at $35 per share, it would be considered overvalued. 





http://www.trade4rich.com/Calculation.html

Value Investing - Peter Lynch's Formula

 Peter Lynch's Formula  Peter Lynch 's astounding record makes him the greatest mutual fund manager in history. In his book One Up on Wall Street, Lynch gives a simple, straight-forward explanation as to how he does a quick and dirty valuation of a firm's growth versus its stock price. Here's just a short quote explaining how he does it.

The P/E ratio of any company that's fairly priced will equal its growth rate ... If the P/E of Coca-Cola is 15, you'd expect the company to be growing at about 15 percent a year, etc. But if the P/E ratio is less than the growth rate, you may have found yourself a bargain. A company, say, with a growth rate of 12 percent a year ... and a P/E ratio of 6 is a very attractive prospect. On the other hand, a company with a growth rate of 6 percent a year and a P/E ratio of 12 is an unattractive prospect and headed for a comedown.

In general, a P/E ratio that's half the growth rate is very positive, and one that's twice the growth rate is very negative.

Lynch's formula is as follows:

Intrinsic Value = EPS * G

EPS = Earnings per Share , G = Long Term EPS Growth Rate 


http://www.trade4rich.com/Lynch.html

Value Investing - Benjamin Graham's Formula

Benjamin Graham's Formula   


In The Intelligent Investor, Benjamin Graham describes a formula he used to value stocks. He disregarded complicated calculations and kept his formula simple. In his words: 
"Our study of the various methods has led us to suggest a foreshortened and quite simple formula for the evaluation of growth stocks, which is intended to produce figures fairly close to those resulting from the more refined mathematical calculations."

His formula is as follows:

Intrinsic Value = EPS * (8.5 + 2* G)

EPS = Earnings per Share, G = Long Term EPS Growth Rate

This formula has little practical value to most value investors. A company with an expected growth rate of 10% in EPS could have a P/E (Price/Earnings) of 28.5 to be considered a buy. Most value investors would reject it. However, Graham also preached Margin of Safety. Therefore, taking this formula and allowing a 50% Margin of Safety you arrive at a P/E of 14.25 . Many value investors would take a hard look at a company with a 14.5 P/E growing earnings at 10% a year.

The formula is efficient and simplistic but has its limits:  the model doesn’t work for every stock. It should never be used in isolation. The investor must take into account many other factors such as current asset value, debt to equity ratio etc. 


http://www.trade4rich.com/Benjamin.html

Comment: Warren Buffett thought Benjamin Graham was not at his best when he came up with the various formulae to value stocks.

Value Investing - Warren Buffett's Methodology

Warren Buffett's Methodology  Warren Buffett descends from the Benjamin Graham school of value investing. He takes this value investing approach to another level. He chooses stocks solely on the basis of their overall potential as a company - he looks at each as a whole. Holding these stocks as a long-term play, Buffett seeks not capital gain but ownership in quality companies extremely capable of generating earnings. When Buffett invests in a company, he isn't concerned with whether the market will eventually recognize its worth; he is concerned with how well that company can make money as a business.

Brief summary Buffett's methodology:
1. Has the company consistently performed well? 
Sometimes return on equity (ROE) is referred to as "stockholder's return on investment". It reveals the rate at which shareholders are earning income on their shares. Buffett always looks at ROE to see whether or not a company has consistently performed well in comparison to other companies in the same industry.
2. Has the company avoided excess debt? 
The debt/equity ratio is another key characteristic Buffett considers carefully. Buffett prefers to see a small amount of debt so that earnings growth is being generated from shareholders' equity as opposed to borrowed money.
3. Are profit margins high? Are they increasing? 
The profitability of a company depends not only on having a good profit margin but also on consistently increasing this profit margin. To get a good indication of historical profit margins, investors should look back at least five years. A high profit margin indicates the company is executing its business well, but increasing margins means management has been extremely efficient and successful at controlling expenses.
4. How long has the company been public? 
Buffett typically considers only companies that have been around for at least 10 years. It makes sense that one of Buffet's criteria is longevity: value investing means looking at companies that have stood the test of time but are currently undervalued.
5. Do the company's products rely on a commodity? 
Buffett sees this question as an important one. He tends to shy away (but not always) from companies whose products are indistinguishable from those of competitors, and those that rely solely on a commodity such as oil and gas. If the company does not offer anything different than another firm within the same industry, Buffett sees little that sets the company apart. Any characteristic that is hard to replicate is what Buffett calls a company's economic moat, or competitive advantage. The wider the moat, the tougher it is for a competitor to gain market share.
6. Is the stock selling at a 25% discount to its real value? 
Buffett's most important skill is determining whether a company is undervalued. To do this, an investor must determine the intrinsic value of a company by analyzing a number of business fundamentals, including earnings, revenues and assets. And a company's intrinsic value is usually higher (and more complicated) than its liquidation value - what a company would be worth if it were broken up and sold today. The liquidation value doesn't include intangibles such as the value of a brand name, which is not directly stated on the financial statements.   Once Buffett determines the intrinsic value of the company as a whole, he compares it to its current market capitalization - the current total worth (price). If his measurement of intrinsic value is at least 25% higher than the company's market capitalization, Buffett sees the company as one that has value to buy.



http://www.trade4rich.com/Buffett.html

Our aim as value investors is to find quality businesses at discounts to their intrinsic values.


To Invest or Not to Invest?

When making decisions about a company it is vital to asses not just if they are making profits but if they are generating a suitable return on equity for you, the shareholder. Imagine a business XYZ you invest 10million of your money into it. By the end the year it is made a net profit of 5 million. Pretty good; a 50% return on equity is a business I would like to invest in. Basically this is the golden key to value investing. Avoid the newspapers. This is how I invest and this is what works for me. 

Technical analysis requires to much "if this goes up it will do this" and "if this breaks through it will do this". Regularly I frequently hear analysis say this keyword "IF". For me, I don't like "IF", I like a sure thing. This is why finding good quality businesses, with a proven track record of success is the best way to financial success.

Our aim as value investors is to find quality businesses at discounts to their intrinsic values. 


http://valueinvest101.blogspot.com/2011/03/to-invest-or-not-to-invest.html

Value investing will almost always be right.


How to Play the Market: Irving Kahn

By  on April 12, 2012

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No two recoveries are alike. When I came to Wall Street in 1928, I thought the market was crazy. It hit the brakes in ’29. You have to be careful to distinguish between one recovery and the other. You stick to value, to Benjamin Graham, the man who wrote the bible for the market. It’s a mistake to believe you can do more, I warn you. John Maynard Keynes was one of the most famous economists in history. He was a genius, but he failed as a macro investor. It was hard to believe at the time. But when he became a bottom-up value guy, well, he became very successful. With value investing, you don’t have to bend the truth to accommodate periods with derivatives and manias. Value investing will almost always be right.

I’ve seen a lot of recoveries. I saw crash, recovery, World War II. A lot of economic decline and recovery. What’s different about this time is the huge amount of quote-unquote information. So many people watch financial TV—at bars, in the barber shop. This superfluity of information, all this static in the air.

There’s a huge number of people trading for themselves. You couldn’t do this before 1975, when commissions were fixed by law. It’s a hyperactivity that I never saw in the ’40s, ’50s, and ’60s. A commission used to cost you a hell of a lot; you couldn’t buy and sell the same thing 16 times a day.

You say you feel a recovery? Your feelings don’t count. The economy, the market: They don’t care about your feelings. Leave your feelings out of it. 

  • Buy the out-of-favor, the unpopular. 
  • Nobody can predict the market. 
  • Take that premise to heart and look to invest in dollar bills selling for 50¢. 
  • If you’re going to do your own research and investing, think value. 
  • Think downside risk. 
  • Think total return, with dividends tiding you over. 
  • We’re in a period of extraordinarily low rates—be careful with fixed income. 
  • Stay away from options. 
  • Look for securities to hold for three to five years with downside protection. 
You hope you’re in a recovery, but you don’t know for certain. The recovery could stall. Protect yourself. — As told to Roben Farzad

Kahn, chairman of investment firm Kahn Brothers Group, was born in 1905

http://www.businessweek.com/articles/2012-04-12/how-to-play-the-market-irving-kahn

Grantham on China and value investing

Value Investing Tips - How to Assess a Company's Management

Value Investing Academy - Real People, Real Results


Mary Buffett Reccommends Value Investing Academy

The Power of Consumer Monopoly

Warren's Criterias for Choosing Winning Business

Warren Buffett On Value Investing- How to allocate capital.