the little guide to prudent investing 022010 - value hunter

8/14/2019 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



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VALUE

INVESTING Asset Value



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VALUE

INVESTING Earning Power Value



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VALUE

INVESTING Earning Power Value



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VALUE

INVESTING Value Creation



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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



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VALUE

INVESTING Investments in Companies with Low P/E



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VALUE




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VALUE




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VALUE

INVESTING International Markets: Value vs. Growth



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VALUE

INVESTING Investment Returns Based on Market Capitalization



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VALUE

INVESTING Investment Returns Based on Market Capitalization (US)



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VALUE

INVESTING Investment Returns Based on Market Capitalization (US)



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VALUE

INVESTING Investment Returns Based on Market Capitalization (Non-US)



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VALUE

INVESTING Investment Returns Based on Market Capitalization (Non-US)



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VALUE

INVESTING Results Based on Holding Period



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VALUE

INVESTING Value vs. Growth



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VALUE

INVESTING Investing in Companies with Low P/Cash Flow



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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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