The next recession

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THE BEAUTY OF VALUE INVESTING

The beauty of value investing is its logical simplicity. It is based on two principles : what’s it worth (intrinsic value), and don’t lose money (margin of safety).

Benjamin Graham was the first to introduce these concepts, which are as relevant today as they were then.

Think about bankers when they make a loan, they first look at the collateral the borrower has to pledge to secure the loan. Next, they look at the borrower’s income for paying theinterest on the loan. If a borrower earns $75,000 a year and wants to take out a $125,000 mortgage on a $250,000 house, that is a pretty safe bet. However if someone earning $40,000 a year wants to borrow $400 000 to buy a $425 000 house, it is notso safe.

Stocks are not unlike houses. When you apply for a mortgage, the bank sends an appraised to value the house you want to buy. In the same way, an analyst acts like an appraiser trying to estimate the value of a business.

That’s where the concept of intrinsic value originates from.

It is the price that would be paid if a company were sold by a knowledgeable owner to a knowledgeable buyer in an arm’s-length negociated transaction.

There is so few investors who pay close attention to intrinsic value, but it is important for two reasons : it enables investors to determine if a particular stock is a bargain relative to what buyer of the entire company would pay, and it lets investors know if a stock is overvalued.

The overvalued part of the equation is even more important if you don’t want to lose money.

Founder and CEO of the largest hedge fund of the world warns about the future

THE 2 Questions Warren Buffett asks himself before buying a company

There is 2 questions that Warren asks himself when he’s looking at companies to invest.

They are absolutely crucial and fundamental to your invesment strategy, the answer to both of these questions should determine if you’re buying or not the company shares.

– HOW MUCH DO WE THINK IT’S WORTH ?

– HOW MUCH IS IT SELLING FOR ?

When Warren bought Petrochina at 20 billion. He thought the company was probably worth 100 billion.

But here’s the key : he didn’t look at the price first, he looked at the business to figure out how much is it worth.

Because if you look at the price first you’ll get influenced by that.

So you look at the company first, you try to valuate and then you look at the price. And if the price is way less than what you just valuated.

Then, you’re gonna buy it

2 AREAS for the VALUE INVESTOR

To obtain higher than average results on the long term, we have to develop a selective policy which check those 2 points :

– we have to define objective tests or rationals

– this policy has to be different than the one followed by the majority of investors or speculators.

THE RELATIVELY UNPOPULAR BIG COMPANY

If we take for granted that it is usual for the market to overvalue companies market value which showed excellent growth or which are a trend for whatever reason, we can logically expect them to undervalue companies who are neglected because of temporary negative evolutions.

Find those large companies who are temporarily unpopular.

Even though, small companies are also undervalued, large companies have the advantage of having financial resources and humans.

BUYING GOOD OPPORTUNITIES

We qualify of good opportunity, a stock which after a complete financial analysis, seem to be worth considerably higher than its market value.

A good opportunity is considered when its intrinsic value is at least 50% higher than its price.

The ROLE of INTRINSIC VALUE

The essential point is that security analysis does not seek to determine exactly what is the intrinsic value of a given security. It need only to etablish either that the value is adequate, to justify a stock purchase, or else that the value is considerably higher or considerably lower than the market price. For such purposes an indefinite and approximate measure of the intrinsic value may be sufficient. To use a homely simile, it is quite possible to decide by inspecting a woman is old enough to vote without knowing her age.

In the Wright Aeronautical example, the earlier situation presented a set of facts which demonstrated that the business was worth substantially more than 8 dollars per share, or 1,800 000.

In the year later, the facts were equally conclusive that the business did not have a reasonable value of 280 per share, or 70,000,000 in all. I would would have been difficult for the analyst to determine whether Wright Aeronautical was actually worth 20 dollars or 40 a share in 1922 – or actually worth 50 dollars or 80 dollars in 1929.

But fortunately it was not necessary to decide these points in order to conclude that the shares were attractive at 8 dollars and unattractive, intrinsically, at 280 dollars.

This should indicate how flexible is the concept of intrinsic value as applied to security analysis. It would follow that even a very indefinite idea of intrinsic value may justify a conclusion if the the current price falls for outsider either the maximum or minimum appraisal.

4 types of businesses with DURABLE COMPETITIVE ADVANTAGE

We all know what Warren Buffett is looking for in a company, he wants a company with a durable competitive advantage selling at a fair price.

Here’s are 4 types that are durably competitive proof 😉 :

1 – Business in the ad industry, which provide a service that manufacturers must continuously use to persuade the public to buy their products. The ad industry is a necessary segment of the business world. No matter what, whether you are selling brand-name products or basic services, you need to advertise.

2 – Businesses that fulfill a repetitive consumer need with products that are used up quickly, that have a brand-name appeal, and that merchants have to carry or use to stay in the business. That includes everything from cookies to pantyhose.

3 – Businesses that provide repetitive consumer services that people and businesses are constantly in need of. Such as cleaning services, security services, tax preparer ..

4- Low-cost producers and sellers of common products that most people have to buy at some time in their life.