Value
investment, put simply, means buying a stock, or indeed a business, at less than its
intrinsic value. This method of investment was pioneered by Benjamin
Graham, the father of securities analysis, and has been modified and enhanced by such
legendary investors as Warren Buffett and Peter Lynch.
Graham always took the position that value investment was the only real form of
investment; anything else was speculation.
There are other investment theories such as modern portfolio theory (mixing unrelated
stocks in a portfolio gives less volatility than the average volatility of the stocks);
the efficient market theory, which assumes that the market price of a share accurately
reflects the information available about that particular investment; and the random walk
model.
This section will look at the value investment theories of Graham and others, and the
investment approach of Buffett and Munger. It will also discuss, in time, other investment
strategies.
case studies
We look at several companies to determine, for our own purposes, whether they are worth
further analysis. Coca-cola Boeing - new
Warren Buffett's approach to investment
Introduction to Warren Buffett -The starting page for
Warren Buffett’s investment secrets. Warren Buffett's investment principles - A
summary Warren Buffett and brand names - An area of particular
emphasis for Buffett Warren Buffett and understanding a company -
You need to comprehend a business before investing. Warren Buffett on debt - Why successful investors
like buying into companies with financial strength and little debt. Dealing with inflation - The ability of a company
to raise prices to maintain profitability is important Sticking to what you know - Management should
focus on their areas of strength. Share buybacks - A company can add value to its shares
by buying some of them back, but only for the right reasons. Return on equity - The ability of a company to earn and
increase high returns on its capital is considered by Warren Buffett essential to a share
investment in that company. Price/earnings ratio - Determining the right ratio
of price to earnings of a company can influence the decision to invest or not. Retained earnings - If a company cannot earn more for
shareholders on retained earnings than owners can, it should distribute the profits. Book value - Different intelligent investors have different
opinions about the importance of book value to an investment decision. Company growth - It is not so much the growth in earnings
of a company that is important, it is how they grow, and in what areas. Sound management - Successful investors invest in
companies whose management is sound and honest. Owner earnings - Warren Buffett looks beyond the balance
sheet and concentrates on true owner earnings. The compounding factor Bringing it all together - A summary of the
tests that Warren Buffett is said to apply to a company when considering investment. The right price to pay
Benjamin Graham
Benjamin Graham's Investment Philosophy - A
summary of the lessons given by the man, among whose disciples include some of our most
successful investors. Mr Market - Benjamin Graham’s parable that explains how
investors should rely on their own judgment, after careful analysis, and ignore the
vagaries of the stock market. The Margin of Safety - Considered by many successful
investors as the key to investment gains. Investors should only buy stock at intrinsic
value but with an inbuilt safety margin.
