What Is Value Investing?

[From DEEPWEALTH:]<!- via investwise -->

In a great book and a must-read for investors, “What is Value Investing?”, the author, Lawrence A. Cunningham, writes about the many traditions of value investing.

“Value investing is partly a state of mind. It is characterized by habitually relating the price of a stock to the value of the under­lying business. Basic principles of fundamental analysis are the tools. They arise from three traditions.

Benjamin Graham's margin of safety principle is the first one. It requires assurance that a stock's price is substantially below its esti­mated value. The test requires conducting a full business analysis. To begin, value investors use simple filters that narrow the range of can­didates to those that an investor understands and can evaluate (com­monly known as a circle of competence).

John Burr Williams refined value investing's second core tradition. This quantitative tradition requires estimating a company's intrinsic value measured by the present value of its probable future cash flows, conservatively estimated using current data. This principle captures the intuition that a dollar in hand today is worth more than a dollar paid in the future.

Philip A. Fisher added value investing's third tradition. This qual­itative tradition requires the diligent investor to find a company exhibiting strong long-term prospects. These are indicated by charac­teristics creating a business franchise, such as consumer loyalty, unmatched brand-name recognition, and formidable market power. Also relevant are high-quality managers who can be counted on to channel the franchise's rewards to the company's shareholders.

Warren E. Buffett is the consummate and best-known integrator of these three traditions. Buffett practices a comprehensive method of value investing. He refers to the exercise simply as investing, viewing the modifier "value" as redundant. Other disciples weight the compo­nents differently, producing a range of value investing styles. All are united by appreciating the difference between price and value.