How relevant is value investing in today’s markets? Is there still legitimacy in the theories and practice of such investing? Welcome to the inaugural issue of ValueInvesting Weekly, where we will explore all of these questions, and generate useful ideas that will be beneficial to the investor in the 21st century. These weekly letters will be constructed on the foundation of Benjamin Graham and his legacy of value investing. We look forward to opening an informed and educational dialogue that will benefit all. We encourage you to participate and ask any questions that might arise, or offer any corrections that we overlooked.
As you flip through the channels on cable television, or read the financial pages of newspapers, it is easy to get caught up in the hype that is investing. “Stock ‘A’ surged from 8 to 13 today”, only to be followed by, “Bear markets are going to bring Wall Street to its knees!”. Where does one find the calm within the storm? This is where the concept of value investing creates stability in the investors mind and allows them to think clearly and accurately. Taking a step back first though, allow us to explain and define value investing in simple terms.
Value investing is simply looking for securities that are undervalued for whatever reason, and are currently being traded at a discount in comparison to its true book value. By book value we mean the value of the company as a whole: buildings, inventories, accounts receivable, etc. Finding these securities is not something that is as easy as turning on Cramer on CNBC and having him inform you of what stocks are selling at a discount. Rather, it requires analysis to determine such intrinsic value. Now there are simple ways to get ideas of which stocks might fit into these criteria, such as looking at a company’s working capital. Working capital is the liquid assets of a company, which can be drawn upon by going to the SEC’s webpage (EDGAR) and downloading filings of financial reports and looking for liquid assets. This essentially describes the analytical side of value investing briefly and without digging deep into the theories, but we will address these techniques in later volumes.
Taking value investing into a more psychological setting, let’s consider the greatest investor, Warren Buffett. Warren Buffett was taught by Ben Graham and learned everything he knows of investing from Graham. Buffett learned that investing is not speculating in a company, but becoming an owner with a vested interest. Speculation is looking at a company and off of a hot tip putting hard earned money into a stock – key word here is stock. Investing is intelligently placing your money into a company that you have done research on and are interested in becoming an owner – key word owner. Do you see the difference between the two? Investing is ownership of a company, and speculation is ownership of stock. Again, we are speaking psychologically here, as the two are the same in the fact that you purchase securities whether you are speculating or investing. Buffett never thought of himself as a speculator, but invested in companies that made sense to him because he now owned a piece of that company. Consider the following example: would you want to buy a laundry business that had four competitors on the same street within one mile just because the current owner assures you his business is through the roof? Of course not, but would you want to buy one that is located in the heart of a major metropolitan neighborhood with no other Laundromats in sight? The same thought process can be implemented into investing. Buying a stock that is hyped up without doing any research is as foolish as buying a Laundromat on the current owner’s assurance that it’s a good business. This is why Warren Buffett never did two things: he never bought a stock without researching it, and never bought a stock that he could not understand the business model of the underlying company.
Next week’s issue will begin to look into the theories of value investing deeper, and produce useful ideas of how to implement these into your personal investing.