the little guide to prudent investing 022010 - value hunter
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The Little Guide
VALUEINVESTING
to Prudent Investingwww.valuehuntr.com
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Most analysts feel they must choose between
two approaches customarily thought to be in
opposition: value and growth. Indeed, manyinvestment professionals see any mixing of the
two terms as a form of intellectual cross-dressing.
We view this as fuzzy thinking. In our opinion, the
two approaches are joined at the hip: Growth is
VALUE
INVESTING What is Value Investing?
,
constituting a variable whose importance canrange from negligible to enormous and whose
impact can be negative as well as positive. In
addition, we think that the very term value
investing is redundant. What is investing if it is
not the act of seeking value at least sufficient tojustify the amount paid?
Warren Buffet, 1992 Annual Letter to
Shareholders
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CapitalPreservation
VALUE
INVESTING Core Tenets of Value Investing
Invest with a
Margin of Safety
CapitalGrowth
CapitalAllocation
Buy the Business,
Not the Stock
Invest within
Circle of
Competence
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VALUE
INVESTING Invest With a Margin Of Safety
"If you understood a business perfectly
and the future of the business, you would
need very little in the way of a margin ofsafety. So, the more vulnerable thebusiness is, assuming you still want toinvest in it, the larger margin of safetyyou'd need. If you're driving a truck
MOS: Central Thesis of Value Investing
MOS = Intrinsic Value Price
Emphasis is on Capital Preservation
Protects the investor from both poor,
pounds and you've got a 9,800 poundvehicle, if the bridge is 6 inches abovethe crevice it covers, you may feel okay,but if it's over the Grand Canyon, youmay feel you want a little larger margin
of safety..."
Warren Buffett, 1997 BerkshireHathaway Annual Meeting
decisions and downturns in the market
Because intrinsic value is difficult to
accurately compute, the margin of safety
gives the investor room for error
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VALUE
INVESTING Invest With a Margin Of Safety
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"In the short run, the market is a voting
machine, but in the long run it is a weighing
machine.
Benjamin Graham, The Intelligent Investor
VALUE
INVESTING Invest in the Business, Not the Stock
It's far better to buy a wonderful company
at a fair price than a fair company at a
wonderful price
Warren Buffett
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VALUE
INVESTING Defining Risk
RISK = (AMOUNT OF LOSS) X
(PROBABILITY OF LOSING)
The greater the risk, does not necessarily
mean the greater the return
Rule No.1: Never lose
money. Rule No.2: Never
forget rule No.1
Warren Buffett
Risk erodes returns because of losses
The best investors do not target return; they
focus first on risk, and only then decide
whether the projected return justifies takingeach particular risk.
Risk comes from not
knowing what you're doing
Warren Buffett
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VALUE
INVESTING Volatility is Not Equal to Risk
Risk is not beta or standard
deviation...it is how much you can
lose on an investment and what thechance is that "loss" scenario is
going to play out
Madoff had no volatility
e arman
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VALUE
INVESTING Keep It Simple
The business schools reward difficult
complex behavior more than simple
behavior, but simple behavior is more
effective
Warren Buffett
I don't look to jump over 7-foot bars. I
look around for 1-foot bars that I canstep over
Warren Buffett
There seems to be some perverse
human characteristic that likes to make
easy things difficult.
Warren Buffett
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VALUE
INVESTING The Market Can Be Irrational
Most of the time commonstocks are subject to irrational
and excessive price
fluctuations in both directions
ingrained tendency of mostpeople to speculate or
gamble... to give way to hope,
fear and greed
Ben Graham
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VALUE
INVESTING Portfolio Diversification
Wide diversification is only required when
investors do not understand what they are
doing
Warren Buffett
"We are able and willing to concentrate our
capital into our best ideas. These days, other
investors' idea of "risk control" is to own literallyhundreds of small positions while making no size
able bets, a strategy that might also be labeled
"return control". It is clearly an advantage, but
by no means without risk, to be able to
concentrate our exposures. We work
exceptionally hard to ensure that our largestpositions are indeed our most worthwhile
opportunities on a risk-adjusted basis."
Seth Klarman
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VALUE
INVESTING Investing the Graham Way
Grahams stringent
investment criteria
maximized his Margin
of Safety
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VALUE
INVESTING Ignore Analyst Forecasts
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VALUE
INVESTING Ignore Growth Forecasts
"Even the intelligent investor is
likely to need considerablewillpower to keep from following
the crowd."
"It is absurd to think that the
general public can ever make
money out of market forecasts.
Benjamin Graham
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VALUE
INVESTING Go Deep to Hunt for Value
Large Caps
12 analysts per
company
250 companies
Mid Caps
7 analysts per
company
1000 companies
U.S. Exchanges
Small Caps 1 analyst per
company
1,500 companies
Micro Caps
0 analysts per
company
3,000 companies
"Size is always a problem. With tiny sums to
invest, it's extraordinary what you can find.Most of the time, big sums are one hell of an
anchor
Warren Buffett
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VALUE
INVESTING Buy and Hold
Much success can be attributed to
inactivity. Most investors cannot
resist the temptation to constantly
buy and sell
Warren Buffett
We believe that according the name
We don't get paid for activity, just
for being right. As to how long we'll
wait, we'll wait indefinitely
Warren Buffett
investors to institutions t at tra e
actively is like calling someone whorepeatedly engages in one-night
stands a 'romantic.'
Warren Buffett
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VALUE
INVESTING
Investment Process
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VALUE
INVESTING Process
Source: Columbia Business School
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VALUE
INVESTING Elements of Value
Source: Columbia Business School
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VALUE
INVESTING Asset Value
Source: Columbia Business School
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VALUE
INVESTING Earning Power Value
Source: Columbia Business School
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VALUE
INVESTING Earning Power Value
Source: Columbia Business School
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VALUE
INVESTING Value Creation
Source: Columbia Business School
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VALUE
INVESTING
Evidence of Over-Performance
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VALUE
INVESTING Investments in Companies with Low Price/Book
Source: Tweedy, Browne & Co.
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VALUE
INVESTING Investments in Companies with Low NCAV
Source: Tweedy, Browne & Co.
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VALUE
INVESTING Investments in Companies with Low P/E
Source: Tweedy, Browne & Co.
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VALUE
INVESTING Investments in Companies with Low P/E
Source: Tweedy, Browne & Co.
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VALUE
INVESTING Investments in Companies with Low P/E
Source: Tweedy, Browne & Co.
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VALUE
INVESTING International Markets: Value vs. Growth
Source: Tweedy, Browne & Co.
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VALUE
INVESTING Investment Returns Based on Market Capitalization
Source: Tweedy, Browne & Co.
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VALUE
INVESTING Investment Returns Based on Market Capitalization (US)
Source: Tweedy, Browne & Co.
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VALUE
INVESTING Investment Returns Based on Market Capitalization (US)
Source: Tweedy, Browne & Co.
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VALUE
INVESTING Investment Returns Based on Market Capitalization (Non-US)
Source: Tweedy, Browne & Co.
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VALUE
INVESTING Investment Returns Based on Market Capitalization (Non-US)
Source: Tweedy, Browne & Co.
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VALUE
INVESTING Results Based on Holding Period
Source: Tweedy, Browne & Co.
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VALUE
INVESTING Value vs. Growth
Source: Tweedy, Browne & Co.
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VALUE
INVESTING Investing in Companies with Low P/Cash Flow
Source: Tweedy, Browne & Co.
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VALUE
INVESTING Ben Grahams Performance
Source: Kahn Brothers Group, Inc.
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VALUE
INVESTING Walter Schloss Performance
Source: Super Investors of Graham & Doddsville
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VALUE
INVESTING Warren Buffetts Performance
Source: Super Investors of Graham & Doddsville
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