Value investing often conjures up images of mature, sometimes quite ordinary companies that sell for cheaper than the overall market. While it’s true that most value stocks have low metrics, there is a lot more to this strategy than numbers. It is a combination of art and science, and it begins with a mathematical principle taught in the first lesson of every Finance 101 course:
The value of an asset (i.e. business) is the present value of its future cash flows.
As value investors, we will aim to scientifically value a company based on real numbers and realistic projections – the exact opposite of wild assumptions (or hope) that a company will grow 20% forever. In other words, instead of jumping blindly into what’s “hot,” we’re using solid data and analysis to more accurately identify a company’s future value.
That’s my job, and I’ll be diving head first into the numbers while you get to sit back and reap the rewards. But don’t get me wrong, I absolutely love this part of my job!
It all goes back to 1934, when Benjamin Graham – the father of value investing – changed the game by publishing Security Analysis. For the first time, a scientific framework was laid out to analyze and value stocks. Security Analysis became the Bible of value investing, and remains so to this day.
Next came Warren Buffett, who refined Mr. Graham’s original methods and turned them into modern day value investing. He went along to become Mr. Graham’s intellectual successor as well as the greatest investor of our time. Mr. Buffett added qualitative methods to the previous qualitative approach, seeking bulletproof franchises with large “moats” that dominate his current Berkshire Hathaway portfolio. Mr. Buffett believes – and I agree with him – that if a business is solid and keeps generating cash, the stock almost has to go up over time. And those are the kinds of businesses to invest in.
That’s just a brief description and history of what value investing is.
Hilary Kramer is the editor of GameChangers, Value Authority, High Octane Trader, Triple-Digit Trader, 2-Day Trader, IPO Edge and Inner Circle.
Hilary Kramer is an investment analyst and portfolio manager with 30 years of experience on Wall Street. The Financial Times describes Ms. Kramer as “A one-woman financial investment powerhouse” and The Economist distinguishes her as “one of the best-known investors in America”. Ms. Kramer is often quoted in publications such as the Wall Street Journal, New York Post, Bloomberg, and Reuters. She is a frequent guest commentator on CNBC, CBS, Fox News and Bloomberg, providing investment insight and economic analysis.