What is Value Investing?

The following is yet another value investment blog. The internet is filled with them. From Gannon investing, to Rick's Value Investing discipline and countless others. Many are quite good and quite impressive. Yet I still feel I have something to add I hope.

First I'd like to start with interpretation of what value investing is.

Marty Whitman in his fine book on value investing said it best. Value Investors are only concerned with what "is". That is, the factors that effect the value of the business. What is the value of a business? The value of a business is what a buyer might pay for the business. The value of a business is also what the discounted cash flows for the business from now to eternity.

As a value investor we are only concerned with two questions. How good a business is this? And what's it worth? Nothing else matters. Anything else might effect volatility or the price of the stock. Yet volatility might just give you an opportunity to buy a set of assets at a lesser price than you did before. Anything that effects the value of future cash flows over the life of the business is something you need to be concerned about. Anything else? Its just noise. The best investors have an uncanny ability to seperate what's important (news) from what's noise.

So what's noise? The first type of noise is easy. Its noise that has absolutely nothing to do with the business or its prospects its mostly the noise that has to do with the stock and not the business. There are some investors that are obsessed with this noise. It includes.

#1 Volume

#2 Momenutum

#3 Specialist

#4 Institutional buying

#5 Virtually anything to do with technical analysis.

What do any of these factors have to do with the value of the business? If you look through the pages of INC magazine you will see privately held businesses that are sold every day. Do you think the buyers and sellers of these businesses are concerned with the MCADs or Bollinger Bands? No way. If you want to invest in a businesslike fashion you shouldn't be either.

There are other factors that may or may not have an effect on the short-term cash flows of the stock...and certainly on the direction of the stock...but overall they do not effect the value of the business.

#1 A change in the near forecasting of macro factors.

#2 Changes in analyst estimates and earnings warnings.

#3 The anouncement of a change dividend policy.

#4 Accounting scandals and "headline risk"

#5 Any factor deemed to be temporary and fixable and not permanent.

#6 If the stock is listed or will continue to be listed on an exchange.

Some of these will be contriversial. Aren't stocks that pay dividends supposed to be better? Aren't we supposed to be concerned about accounting? Doesn't a change in interest rates effect the future cash flows of the business? If earnings estimates are "future cash flows" don't changes in them effect the business?

First off, we need to remember that the value of future cash flows is the only thing that effects the value of assets. Any smart buyer of assets assumes that a business will have cyclical upturns and downturns. For some businesses these turns maybe sharper than others, but all will have them. Eventually, the cash that the assets of the company generate will be returned to shareholders. Does it really matter if the company returns it through dividends or by sharebybacks when the stock at a low point? An accounting scandal may effect your ability to determine the value of a company. But does the accounting a company uses effect how much cash its going to generate?

If anything factors such as these can create temporary depressions in stock prices that could be buying opportunties. To be short if there is negative news about a company its something that I need to look at. If a stock is going down by a great deal its something I need to look at. If there is a major change in a company that will effect the long-term future cash flows of the company...like a restructuring or a change in CEOs, its something I need to look at.

Value investors use noise and news to their advantage. An excessive amount of noise will push a stock downward so that it might be a buying opportunity. In the meantime, some news will also be pushed aside or underrated and create a buying opportunity.

I hope you all enjoy this blog...and I welcome any comments. But no matter how you feel about a comment please try to keep it clean.