Sunday, April 5, 2009
Ignore The Headlines And Concentrate On Value
Ignore the headlines and concentrate on the fundamentals. The market has had a nice run the last two weeks bouncing up over 20%. Hey this is great but don't get caught in the hype. Sure you want the market to go up just like most everyone else, however to many people get caught up in the NOW, that is, what the Stock Market is doing today, this week or next month. Forget that crap and concentrate on investing in businesses. As an Independent Investor one needs to focus on the true worth or the actual value of the business. Its the same thing as if you were to buy a pizza parlor. How much does the business make? How long will it take to get my money out of it? How much debt do they have? Is this business located in the right place? Is this a dying business or a growing one? These are some of the things you would ask if you were buying an existing establishment. Well the same rules apply to the stock market, except most individuals and institutions do not adhere to these principals. Of course their is no sure fire way but if you focus on a few basic fundamentals such as book value or free cash flow this will help in whittling down some prospective investments. For those that might be new, book value is defined as the total value of the company's assets that shareholders would theoretically receive if a company were liquidated. Warren Buffett uses the book value as a measuring stick, often looking at the growth in book value. Free Cash Flow represents the cash that a company is able to generate after laying out the money required to maintain or expand its asset base. Currently Wellpoint $WLP is a good example of a business with excellent free cash flow.