True Value Investors are a Rare Breed

‘TEMPORARY LOSERS’ ARE THE MOST PROFITABLE INVESTMENTS

No rational investor claims to be seeking to buy the most expensive stocks.  Of course, everyone wants to buy a stock low and sell it high, but what is it that sets ‘true value investors’ – who are actually quite rare – apart from other investors?  And what sets ‘Deep Value’ investors (even more rare, indeed) apart from ‘regular’ value investors?  Consider the different types of investors:

1) TECHNICAL (PRICE-BASED) INVESTORS

First, let’s consider the technical analysts. This group of investors almost abhor fundamental analysis. They typically study past price patterns and volume levels seeking to extrapolate and infer future price movements from those historical patterns of supply and demand. Technicians care nothing about a stock’s fundamental aspects, never considering a company’s balance sheet or earnings power in the analysis.  Instead, they plot charts of price patterns in the past and seek to infer future patterns from the past patterns.  Technical analysis lends itself to very short-term (frequently day- or even hourly trading), which is something most investors neither have the time nor inclination for doing.

Does technical analysis work as an investment approach?  Sure, it works for some. We even use it ourselves as an enhancement to (not a driver of) our approach, but we know of no investors who claim to have become millionaires or billionaires from a purely technical approach, do you? On the other hand, many investors can bring to mind a half-dozen or more names of billionaires from the world of value investing.  But first let’s examine some other more common alternative investment investing approaches…

2) MACRO-FUNDAMENTALISTS

Macrofundamentalists are concerned with broad economic factors that affect stocks as a whole.  These investors are interested in things such as interest rates, unemployment rates, gross domestic product (GDP), and business cycles.  This top-down approach starts with the overall economy and works its way down to specific sectors and then to specific companies.  Like any other investor, macrofundamentalists seek to buy low and sell high, and they hope that their superior analysis of the overall economy will allow them the privilege of doing that.  Again, I don’t know many macrofundamentalist  billionaires, although there may be one.

3) MICRO-FUNDAMENTALISTS

The type of investors who analyze specific companies, taking apart the financial aspects of each, are called micro-fundamentalists.  Even among microfundamentalists, value investors in the tradition of Graham and Dodd are very rare. The common approach of microfundamentalists begins with the current price of the stock as the point of departure in analyzing a company.

These investors research how the price of the stock has reacted historically to changes in earnings, changes in the company’s industry,  changes in the product channel (i.e., channel checks), improvements in product technology and new product development (think Apple). Others focus on management of the company, and management shakeups (think Hewlett-Packard or Yahoo) as the starting point of their investment.  These microfundamentalists try to anticipate how changes to these various factors are going to affect the future price of the stock.  Again, because of their self-perceived expertise, they believe they can estimate future prices better than the next analyst, thereby buying low and selling later at a higher price.

Another style of microfundamentalist investor places all of their attention on company earnings. We all know how much brouhaha surrounds ‘earnings season’ every quarter, and how the TV-business news channels like to make a big, dramatic announcements when a popular company’s earnings ‘surprise the street.’

Many microfundamentalists focus their efforts on analyzing and predicting (using what they hope is a greater degree of effectiveness than other approaches) a company’s future earnings. When they find a stock that they believe is underpriced compared to their estimate of future earnings growth, they buy. They believe they are buying low- and based upon their superior knowledge of the future – they intend on selling high. At least that is the foundation of their hope.

Those are the primary types of investors in the world: 1) Technical Analysts, 2) Macrofundamentalists with a top-down analysis, 3)Microfundamentalists focusing on company-specific events that might impact the stock, or 4) Microfundamentalists who think they have a sharper insight into a company’s earnings prospect. These categories account for 90% or more of all investment approaches.

Two Consistent Themes

There are two consistent themes among each of these common investment approaches.  One is a focus on anticipated changes in prices, and the second consistent theme is a focus on estimations of future events.

If you listen to any of the television business-news channels with these two themes in mind,  you will hear them over and over and over. Each of the guests is promoting his own style of expertise, and almost to a man they are making a prediction about the change of prices based on an estimated outcome in the future.  One will say they ‘expect Apple to have strong price performance going into the third and fourth quarter as a result of the introduction of a new iPhone.’  Another will say they expect the prices of materials and industrial stocks to surge higher as the economy picks up steam going into next year.   If you listen to the TV news channels, or read any of the printed investment newspapers, you will hear these approaches to investing over and again.

4) VALUE – THE RARE APPROACH

True value investing in the Graham and Dodd tradition makes no estimation whatsoever of the future. True value investing starts with a careful analysis of the present value of the company - assigning a per-share worth, and then looks at the current level of a stock’s price compared to the current underlying value of the company.  Once the value of a company is determined by careful micro-fundamental analysis, and a ‘margin of safety’ (usually 30% or more) is subtracted from that value, the true value investor can determine whether a specific stock is an attractive or unattractive prospect.

Under no circumstance is an estimation of future outcomes factored into the analysis. The value investor does not start with the stock’s price – the true value investor starts with the underlying company’s intrinsic value, then compares the stock price to the intrinsic price, seeking a bargain.  The bargain is the key aspect of the value approach. This is also why true value investing is the LEAST RISKY approach to investing: you are buying at less than fair market/liquidation value!

The best estimation of a true bargain is buying a stock below the value of the company’s liquid assets. It doesn’t happen often, but when it does, it’s a beautiful thing! This is really the goal of ‘DEEP VALUE’ investing. We seek to purchase the beaten-down stock of weakened companies, companies where it is unclear if they will survive.

This is why true value investing is a very rare approach. Many thousands of people will tell you that they are ‘value investors,’ but they aren’t – at least in the classic, Graham and Dodd sense. Most are simply micro-fundamentalists that are pinning their hopes on an estimation of the future and a guess that the stock’s price will be higher tomorrow than it is today. Estimating the future and guessing outcomes based on those estimates is a very poor way to invest for the future, but that’s how its usually done.

Each of the investment approaches we discussed earlier is a valid approach if pursued carefully and diligently, but the key is that there is an estimation of the future involved in each of those approaches, and as far as we know, no one has the proverbial crystal ball to consistently and flawlessly to forecast the future.

You are apparently a member of the small group of individuals who recognize this fact and see true, Graham and Dodd-oriented, Deep-Value investing as the clear choice for you. We’ll help you with insights and stock suggestions that meet this choice.

To join IntelligentValue.com now and get instant access to our VALUE portfolios which have truly phenomenal returns, go to this link: http://www.intelligentvalue.com/subscribe.htm.  Get a special 2-week trial forFREE with a full Money-Back Guarantee if you continue!

INTELLIGENTVALUE – OUR MISSION

IntelligentValue.com was founded with a mission to assist individuals in their effort to achieve consistently outstanding investment returns through the dedicated practice of the value approach to selecting stocks.

CLASSIC VALUE INVESTING

To accomplish this goal, we start with Classic Value Investing as taught by the ‘Grandfather of Value Investing,’ Benjamin Graham, which focuses on buying the stock of quality companies when their shares are selling at a significant ‘margin of safety’ below the true value of those shares.

In the world of private business M&A, there is rarely a reason that a company would sell for less than its intrinsic value, or in rare circumstances, at its breakup, firesale value. However, in the world of publicly traded companies, we are sometimes able to buy the stock of firms that are selling at a significant discount to their true value – at no fault of their own.  Frequently, the market simply dips because of worry over this or that issue.

We optimize the likelihood of outsized gains by purchasing ownership in publicly held corporations at those rare times when their stock is selling at a deep discount to their intrinsic value. The investment is then sold when those shares are selling equal to, or at a premium to, that inherent value.

MARKET TREND IDENTIFICATION TO AVOID DEEP DRAWDOWNS

IntelligentValue.com takes classic value investing one more step by using the power of computers to develop and track a proprietary composite indicator that helps us determine the turn points of market trends before their occurrence.

In this way we are able to reduce exposure during MARKET DOWN periods and then purchase a fresh, new set of undervalued positions when we receive a MARKET UP signal. The result is incredible returns – far greater than the returns we would be able to achieve without our ‘Intelligent Market Timing Model.’ Subscribers to IntelligentValue.com get the clear signals from the timing system as well as multiple value-based portfolios to choose from. We even have ALTERNATIVE Portfolios that stay invested 95% of the time so that subscribers will always have an option for choosing the best undervalued stocks.

THE SERVICES WE OFFER FOR VALUE INVESTORS

Since our launch in September 2004, IntelligentValue.com has been a proven tool for sophisticated individual investors as well as part-timers and amateurs alike. The information, analysis, and value-investing tools provided are unparalleled by any other site or newsletter.

1) MODEL PORTFOLIOS: We provide three categories of model portfolios, including ‘Value-Plus,’ ‘Guru,’ and ‘Alternative.’ Each category has several selections from which to choose. These model portfolios are time-tested and we provide the back-test data and charts, factors and formulas used, closed-position returns, and detailed performance analysis so that you can understand the basis for each portfolio and choose the one(s) that best fit your objectives. Real-time performance as well as clear charts, detailed statistics, and clear listing of the returns of each position make these model portfolios incredibly useful.

2) INTELLIGENT MARKET TIMING MODEL (IMTM): This proven market-timing system has been in operation for almost 10 years now, carefully amended and refined along the way, assisting our subscribers in dramatically improving their investment returns by reducing losses and turbocharging portfolio gains.

For example, our most recent two market signals were a MARKET UP signal on NOVEMBER 18, 2012, and a MARKET DOWN signal on FEBRUARY 21, 2013. A look at the chart  of any major index (S&P 500, etc.) will show you that these two calls, as well as many before over the last 8 to 10 years were right on the money. By using an almost foolproof method of identifying market trends, we are able to optimize our returns by purchasing at definite lows and selling at definite highs. The result is incredibly increased returns. Over the course of a few years, returns can sometimes be doubled or better.

3) INTELLIGENTVALUE ALERTS:  We publish highly informative ‘Market Alert’ and ‘Value Alert’ newsletters whenever there is a significant change in the market – or new, value-based stocks that we want to financially analyze. These newsletters are not published on any established schedule, but are published when there is a real reason to alert you to an important event.

Put together, the features of IntelligentValue are unparalleled by any other investment tool available for the intelligent individual investor. If you’re not already a subscriber, please check out our Subscribe Page to see just how inexpensive it is to get all the tools and benefits of IntelligentValue.com!

The Logic of Value Investing is Clear

In 1934, Benjamin Graham, a Cambridge business professor considered by many to be the ‘Grandfather of Value Investing,’ teamed up with fellow professor David Dodd and wrote what would later be considered ‘the bible of equity investing,’ Security Analysis.’  A few years later, Graham wrote the classic investing tome, ‘The Intelligent Investor,’ which Warren Buffett describes as “the best book about investing ever written.”

Seeing his family suffer through economic troubles when he was young, and later in life hardened by the terrible investment losses of the Great Depression, Graham was influenced to sysytematically select stocks that he could purchase with what he called a significant margin of safety. In times of economic meltdown (such as the Great Depression or the 2008 crash), that may be a discount to a company’s liquidation value or a discount to its cash- minus-all-debts. In today’s investing environment, which is becoming more to akin to a ‘managed economy’ than a free-market economy, it’s less about buying a stock at a discount to its book value or its cash, but instead buying the stock at a significant discount to its acquisition value – as if it were a private company.

VALUE INVESTING is Your Best Choice to Achieve Outstanding Returns

Value investing has proven to be the most profitable way to achieve steady, market-beating returns over the long run.  In the short term, some trading methods can make spectacular returns, but no approach can match the returns you can achieve over time through conservative, disciplined approach that is founded in value investing.

Always a great example of the power of seeking value over growth, Warren Buffett has become America’s richest man simply by following the teachings of his college professor, Ben Graham.  When he graduated from Cambridge University, Buffett started out with just $500 that he had saved and formed a small investing partnership with friends. That $500 grew into a net worth of more than $80 billion today, making Buffett one of the richest men in the world, simply through the dedicated  application of the teachings of his professor, Ben Graham.

A few years ago, respected reseach firm Ibbotson Associates conducted an extensive study which shows that over 80 years, value stocks beat both growth stocks and the S&P 500 by a wide margin.  In fact, over that 80-year time period, a $1,000 investment would have turned into $5,000,000 (five million dollars).

Most investors don’t have 80 years, so another way to calculate Ibbotson study’s return from value investing in todays terms is to start with $10,000 over just 25 years, which would produce $1.3 million.  But the point is that there are many approaches to investing, and investing fads come and go – most of them dismal failures – but value investing consistently produces sound, market-beating returns year after year.

That fact doesn’t stop the average investor from chasing spectacular shooting corporate stars.  Decades ago, it was the ‘Nifty Fifty’ that captured many investor’s imagination.  In the late 90′s, internet stocks were supposed to be fueling a ‘new economy’ before they flamed out.  Growth stocks with a good ‘story’ of wonderful future expectations as well as momentum stocks of the moment are always an attaction to inexperienced investors.

In 2004, about the time IntelligentValue was launched, Krispy Kreme Donuts (KKD) was crashing to the dust following the reversal of a meteoric 350% gain. But to come to the rescue of all the momentum chasers, Taser (TASR) became the new popular rage as its price shot from $1 per share at its IPO to $30 before returning to the single digits within a year.  Shooting stars attact a lot of attention, but neither momentum, high growth, nor fads can hold a candle to the consistent, logic-based effectiveness of value investing.

Value Investing for Outstanding Returns

In 1934, Benjamin Graham, a Cambridge business professor considered by many to be the ‘Father of Value Investing,’ teamed up with fellow professor David Dodd and wrote the ‘bible of equity investing,’ Security Analysis.  A few years later, Graham wrote the classic investing tome, The Intelligent Investor, which Warren Buffett describes as “the best book about investing ever written.”

Seeing his family suffer through economic troubles when he was young, and later in life hardened by the terrible investment losses of the Great Depression, Graham was influenced to sysytematically select stocks that he could purchase with what he called a significant margin of safety. In times of economic meltdown (such as the Great Depression or the 2008 crash), that may be a discount to a company’s liquidation value or a discount to its cash- minus-all-debts. In today’s investing environment, which is becoming more to akin to a ‘managed economy’ than a free-market economy, it’s less about buying a stock at a discount to its book value or its cash, but instead buying the stock at a significant discount to its acquisition value – as if it were a private company.

VALUE INVESTING IS THE MOST PROFITABLE APPROACH

Value investing has proven to be the most profitable way to achieve steady, market-beating returns over the long run.  In the short term, some trading methods can make spectacular returns, but no approach can match the returns you can achieve over time through conservative, disciplined approach that is founded in value investing.

Always a great example of the power of seeking value over growth, Warren Buffett has become America’s richest man simply by following the teachings of his college professor, Ben Graham.  When he graduated from Cambridge University, Buffett started out with just $500 that he had saved and formed a small investing partnership with friends. That $500 grew into a net worth of more than $50 billion today, through the application of the teachings of his professor Ben Graham.

A few years ago, respected reseach firm Ibbotson Associates conducted an extensive study which shows that over 80 years, value stocks beat both growth stocks and the S&P 500 by a wide margin.  In fact, over that 80-year time period, a $1,000 investment would have turned into $5,000,000 (five million dollars).

Most investors don’t have 80 years, so another way to calculate Ibbotson study’s return from value investing in todays terms is to start with $10,000 over just 25 years, which would produce $1.3 million.  But the point is that there are many approaches to investing, and investing fads come and go – most of them dismal failures – but value investing consistently produces sound, market-beating returns year after year.

That fact doesn’t stop the average investor from chasing spectacular shooting corporate stars.  Decades ago, it was the ‘Nifty Fifty’ that captured many investor’s imagination.  In the late 90′s, internet stocks were supposed to be fueling a ‘new economy’ before they flamed out.  Growth stocks with a good ‘story’ of wonderful future expectations as well as momentum stocks of the moment are always an attaction to inexperienced investors.

In 2004, about the time IntelligentValue was launched, Krispy Kreme Donuts (KKD) was crashing to the dust following the reversal of a meteoric 350% gain. But to come to the rescue of all the momentum chasers, Taser (TASR) became the new popular rage as its price shot from $1 per share at its IPO to $30 before returning to the single digits within a year.  Shooting stars attact a lot of attention, but neither momentum, high growth, nor fads can hold a candle to the consistent, logic-based effectiveness of true value investing.