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Looking for value at the end of the tunnel, to mix metaphors, is not value investing in my mind. For me value investing is establishing the intrinsic value of a business based on its financial statements and prospects and discovering that the stock's price is considerably below this estimate.

By way of contrast, the BMW Method, which principally looks at the stock's price as compared to its historic norm or average, while also seeking underpriced stocks, would not be value investing because the intrinsic value of the business is not established as a business, only the price of the stock. What justifies the BMWM is that it pays more attention to investor sentiment as compared to value investing.

My own preferred method might be called "story investing" because I pay more attention to the company's story, its business methods, its market penetration, its position vs. competitors and its growth prospects than to intrinsic value and I do pay attention to stock price but it's not my main guide.

We are all looking for value in various ways but that does not define value investing. It's the method of establishing value that defines value investing and differentiates it from other forms of looking for value.

For what it's worth...

Denny Schlesinger
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No. of Recommendations: 5
Looking for value at the end of the tunnel, to mix metaphors, is not value investing in my mind. For me value investing is establishing the intrinsic value of a business based on its financial statements and prospects and discovering that the stock's price is considerably below this estimate.

My own preferred method might be called "story investing" because I pay more attention to the company's story, its business methods, its market penetration, its position vs. competitors and its growth prospects than to intrinsic value and I do pay attention to stock price but it's not my main guide.
- Denny

I paused and chewed on these two statements for a while. They're really not all that different and not at all incompatible.

There's that word "prospects." A company's future prospects play a key role both in calculating its intrinsic value or as a reference guide to its suitability as a long-term investment. Either way, the savvy investor, whether crunching numbers or simply looking at the "big picture" must consider all the factors relevant to a company's prospects (e.g., competition, "moats", sustainability, etc., etc.). Good investors invariably take all these factors into account. Some go the extra mile and studiously crunch all the numbers. Some (like me) search for great companies with great prospects then study charts to find great/good/decent entry points. It's all a variation on a common theme.
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No. of Recommendations: 4
Denny wrote:

"For me value investing is establishing the intrinsic value of a business based on its financial statements and prospects and discovering that the stock's price is considerably below this estimate.

By way of contrast, the BMW Method, which principally looks at the stock's price as compared to its historic norm or average, while also seeking underpriced stocks, would not be value investing because the intrinsic value of the business is not established as a business..."


Are you saying that any method of relative comparison isn't value investing? In my mind, you can definitely make a value decision on a stock without ever really having a clearly defined idea of intrinsic value. Especially, if the discount is very high.

An example: Mike's observations of BofA a while back. That was definitely a value discussion. But, when it comes right down to it, no one has a real grip on BAC's intrinsic value. There's too much overhang of litigation, unknown derivative exposure, etc. He went through and sketched out a worst case scenario, determining that in his opinion they should survivor their trouble. There's no real intrinsic value estimate there, but in the end there is a conclusion that it's not at all nutty to make a value case, regardless of that fact. The shares traded at 40% of tangible book value... You can model their performance 'till your blue in the face, but there's so much uncertainty in the models that they can't be representative of reality. Ultimately, making a purchase of BAC at $6 from a value perspective, came down to the simple thesis that it was cheap on a book basis. Despite having no firm grip on intrinsic value involved in your decision making, it's still a value pick.

For that matter, I think a relative valuation that doesn't involve any detailed intrinsic value consideration at all, can still be a value pick. How about Aflac? You can make a detailed DCF study of AFL and generate some idea of intrinsic value. But, you can also just simply compare AFL's relative pricing, and come to the same conclusion without ever attempting to generate an intrinsic value estimate. The stock trades at an 11x multiple, and has historical growth rates of nearly 20%. That's out of whack, no? Yes, you need to couple that with an examination of why it's cheap, and an assesment of how permanent those issue are. (That would fall into the "story" mode of investing you describe, IMO). But, if you come to the conclusion that their European impairment issues are temporary, and that outperformance in Japan will trump those one-timers, ultimately what you come up with is a value call without any detailed intrinsic value estimate. Even if all you do is reason that a PE of 11 is too low for a strong company that's mired in a temporary situation, that's still a value decision in my mind. You don't need a detailed sketch of ten years projected earnings and a discounted net present value to make that value call. All you need is a sense of value to make that call. Why can't that be based off a relative comparison?

To me, value investing is simply taking advantage of apparent mispricings that arise from negative sentiment, on the belief that (1) a stock's price is inherrently connected to the fundamentals of the underlying business and that (2) sentiment will eventually change to reflect that reality. What method you use to make those assessments can vary, and in my mind do not need to involve some hard assessment of intrinsic value.

Peter
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No. of Recommendations: 3
What is value investing?


What comes to mind is that value investing is paying less for something than it is worth. And, that someone, in the future, is likely to offer to pay you more for it than you paid.

But what do the virtual tomes have to say?…

Investopedia offers a general overview:

http://www.investopedia.com/terms/v/valueinvesting.asp#axzz1...

Definition of 'Value Investing'
The strategy of selecting stocks that trade for less than their intrinsic values. Value investors actively seek stocks of companies that they believe the market has undervalued. They believe the market overreacts to good and bad news, resulting in stock price movements that do not correspond with the company's long-term fundamentals. The result is an opportunity for value investors to profit by buying when the price is deflated.

Typically, value investors select stocks with lower-than-average price-to-book or price-to-earnings ratios and/or high dividend yields.

Investopedia explains 'Value Investing'
The big problem for value investing is estimating intrinsic value. Remember, there is no "correct" intrinsic value. Two investors can be given the exact same information and place a different value on a company. For this reason, another central concept to value investing is that of "margin of safety". This just means that you buy at a big enough discount to allow some room for error in your estimation of value.

Also keep in mind that the very definition of value investing is subjective. Some value investors only look at present assets/earnings and don't place any value on future growth. Other value investors base strategies completely around the estimation of future growth and cash flows. Despite the different methodologies, it all comes back to trying to buy something for less than it is worth.



While wikipedia cites Graham, Dodd, and Buffett:

http://en.wikipedia.org/wiki/Value_investing

Value investing is an investment paradigm that derives from the ideas on investment that Ben Graham and David Dodd began teaching at Columbia Business School in 1928 and subsequently developed in their 1934 text Security Analysis. Although value investing has taken many forms since its inception, it generally involves buying securities whose shares appear underpriced by some form of fundamental analysis. As examples, such securities may be stock in public companies that trade at discounts to book value or tangible book value, have high dividend yields, have low price-to-earning multiples or have low price-to-book ratios.

High-profile proponents of value investing, including Berkshire Hathaway chairman Warren Buffett, have argued that the essence of value investing is buying stocks at less than their intrinsic value. The discount of the market price to the intrinsic value is what Benjamin Graham called the "margin of safety". The intrinsic value is the discounted value of all future distributions.

However, the future distributions and the appropriate discount rate can only be assumptions. Graham never recommended using future numbers, only past ones).

For the last 25 years, Warren Buffett has taken the value investing concept even further with a focus on "finding an outstanding company at a sensible price" rather than generic companies at a bargain price.
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Are you saying that any method of relative comparison isn't value investing? In my mind, you can definitely make a value decision on a stock without ever really having a clearly defined idea of intrinsic value. Especially, if the discount is very high.

Peter


Shakespeare said it best: "A rose by any other name would smell as sweet." But to answer your question, yes, that's what I'm saying which is not a disparagement on other forms of looking to make a profit. As I said in my initial post: "Looking for value at the end of the tunnel" is not what defines value investing as a method. How you look for that value would be the defining criteria.

When you say: "Especially, if the discount is very high" yes, compared to what? If the price of the stock is very low compared to the mean, that would be using the BMW Method. If the price of the stock is low compared to book value or intrinsic value or DCF then it would be value investing because the comparison is to value measures of the company, not to investor sentiment, for example, as might be attributed to the BMW Method.

I just want to make a point: I'm not picking on any form of wealth making, just trying to find out what a "Value Hound" is in these parts. I did the same Googling Kelbon did and found the same quotes. What stands out is the lack agreed upon definition of value investing and it changes over time. When Graham and Dodd first wrote, stocks were not value investing, not even investing but speculation. Now stock are respectable. LOL

Denny Schlesinger
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No. of Recommendations: 1
[…]just trying to find out what a "Value Hound" is in these parts.


"Value Hounds" are as various as hound dogs themselves.

Some are as lanky and tall as an Irish wolfhound.
Some are as busy and short-legged as a dachshund.
Some are as fast and sleek as a greyhound.
Some are as sleepy and droopy as a Bassett hound.
Some are as slow and prodding as a bloodhound.
Some are as ancient and wise as a pharaoh hound.
Some are as pretty and elegant as a Saluki.

"Value Hounds" like hound dogs, have excellent hunting skills,
a keen nose, and above all are friendly and sociable.

kelbon
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just trying to find out what a "Value Hound" is in these parts.

Focused on sniffing out values.

So focused in fact, that the regular appearance of a KitKat doesn't distract attention.


TMFHelical
Home Coverage Fool
But not truly a value oriented investor
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