Understanding Value Investing

In the interest of continuing the ongoing trend of examining accessible investing strategies for running personal portfolios, I’m going to dedicate the next few posts to examining how it is that the pursuit of value can fortify a portfolio’s returns. Specifically, I’m going to break down Benjamin Graham and Warren Buffet style investment philosophies, and discuss how they directly apply to all of the fundamental aspects of a company in your portfolio.

To start things off, we need to define what it is that ‘value’ means to us, so that we can recognize it when we see it. Benjamin Graham (Warren Buffet’s professional mentor) defines value as being the pursuit of dollars at the cost of cents. While this might sound like a fairly obvious investment objective, it can sometimes take some serious diligence to find and understand true value. For example, if a company holds $2 of cash for every $1 of share-price, we can very clearly see a value opportunity that is ripe for the pickings.

However, those cash reserves mean nothing in the long-term if they are not being applied towards future benefit. If we see a company earning a large income from selling off minor operations in a given year, that doesn’t justify investment on its own. Lastly, there are instruments of financing out there that can create positions that deceptively illustrate value, even though an investment position in that company is actually being diluted out by the instruments in question.

By understanding the study of where it is that the true values of our portfolios lie, we can better understand where new opportunities lie, where our current opportunities begin to over-extend themselves, and where an alternative security might be hiding. While it can be a fairly time intensive process to find value, it has proven to be one of the most valuable investment strategies possible.

Essentially, you are securing your claim to under-appreciated resources by pursuing value. Until the market appreciates the worth of those assets, you’re choosing to be the one to hang onto them. Granted, it could take a fairly long time before the market comes to appreciate your holdings, but the overall returns tend to more than compensate for your time.

By the end of the ensuing series, I’ll make sure that you’re equipped with the basics of how to find that undervalued dollar, and how to position yourself in a way that will keep you solvent until someone comes along and buys it off of you for twice what you paid in the first place.