Wednesday, March 11, 2009

The Many Facets of A Value Investor

What defines a value investor? Many think that value investing is about picking stocks with low PE ratios or stocks trading under book value. While this is certainly true it is only a small part of the equation. It has been 75 years since Benjamin Graham and David Dodd published their book Security Analysis which was in a time of economic uncertainty, much like, what we are experiencing today. I think any Great or even good investor is a value investor. A value investor can come in different make up. For example, Warren Buffett who is considered by many the best investor of all time, chooses his companies differently than say his contemporary Walter Schloss would. Schloss worked and studied under Ben Graham in the 1950's. Both use the same set of principles that were laid out by Graham, but if you study or listen to these men, these valuing techniques may vary. One reason for these varying in techniques, is Berkshire Hathaway's (Buffett's Holding company), shear size. You won't find many of Buffett's companies trading at Graham prices. Nowadays you here Buffett talk about businesses with economic moats. A good example might be Coca Cola $KO or Burlington Northern Railway $BNI. A economic moat is a business that may have a good brand or name recognition, pricing power or trademarks making it more difficult for rivals to compete effectively. Buffett also searches for companies with plenty of free cash flow. Where as Schloss stuck mainly to Grahams original set of principles, looking for cheap stocks trading at or near NCAV. Another investor who has applied these techniques but also added to the screening process is Joel Greenblatt. Greenblatt uses many of Grahams techniques but applied the Earnings Yield. The earnings yield is a inverted PE ratio. Many value investors take large stakes in companies (controlled or focus investing) which gives them an edge. This allows them to have more influence on day-to- day operations. We have witnessed this through Eddie Lampert's investment in Sears Holdings $SHLD or more recently Sardar Biglari's stake in Steak n Shake $SNS.

Some (Value)Investor Terminology

  • low PE ratio
  • dividend yield
  • earnings yield
  • low debt-to-equity ratio
  • free cash flow
  • managements stake
  • earnings growth
  • NCAV or Net-Nets
  • assets/liabilities
  • current ratio
  • economic moats
  • intrinsic value
  • margin of safety
  • book value
  • controlled investing
  • return on equity

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