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an introduction
to value investing
1. Introduction
to Value Investing
Benjamin
Graham – widely recognised as the father of value investing
– believed that, in the short term, capital markets are
voting machine, with a security’s price reflecting it's popularity with investors on any given day. In the
long term, however, the market is more of a weighing
machine, aligning a security's price with its “intrinsic
value,” or the true worth of the underlying business.
For value investors, this means that a stock’s price and its
intrinsic value often detach from one another in the short
term. Because of the manic-depressive nature of the overall
market – where sentiment can shift between sweeping,
carefree optimism and over-whelming fear and uncertainty
seemingly overnight – prices of securities tend to fluctuate
much more than the true worth of the underlying investments they
represent. This irrationality can materialise on the upside,
lifting prices to dangerously lofty heights. It can also
appear on the downside, dragging prices for select stocks to
bargain levels.
Value investors target the latter situation, purchasing
out-of-favour stocks that are trading at discounts to their
intrinsic values, and then holding these stocks until the
market recognises their true worth. By confidently
approaching the short-term vagaries of the market with
rational, objective analysis, we aim to identify compelling
investment opportunities and deliver solid long-term
results.
2.
The Importance of the Margin of Safety & a Long Term
Perspective
In his investment
guidebook "The Intelligent Investor", Benjamin Graham
challenged himself to “distill the secret of sound
investment into three words.” The three words Graham chose
were “margin of safety.”
What does this phrase mean?
Simply put, the margin of safety represents the difference
between a company’s stock price and its intrinsic value.
Value investors believe that the larger this margin, the
safer the investment. By scooping up stocks trading at
substantial discounts to their estimated intrinsic values,
value investors aim to build portfolios that can accommodate
future uncertainty and demonstrate resilience in market
downturns. Some holdings will inevitably encounter the
occasional stumbling block, and a margin of safety provides
protection if the going gets tough.
When it comes to results, value investors emphasise the
accumulation of lasting wealth over the pursuit of
potentially fleeting short-term gains. Accordingly, we
expect to realise significant profit as the market
recognises the true worth of our stock selections – and we
also acknowledge that this process often takes time. As a
result, we exercise patience and manage our holdings from a
long-term perspective. Typically, we expect to hold a stock
for as long as three to five years.
While the essentials of value investing are simple, the
process of appraising value and risk is complex, and a full
explanation is impossible in this brief summary. For a
thorough understanding of the principles and process of
value investing, see Charles Brandes’ excellent book Value
Investing Today, published in 2003 by McGraw-Hill. Benjamin
Graham’s timeless classic The Intelligent Investor,
published as a revised fourth edition by Harper Business
Essentials in 2003, is an essential item in any value
investor’s library.
3. Value Investing at Cannon
Asset Managers
The
professionals at our firm possess a resolute belief in the
benefits of value investing. This belief permeates all
aspects of our business – from senior-level strategic
decisions to the daily interaction each of our colleagues
shares with clients and financial advisors.
We consistently apply the value investing philosophy in all
market conditions – and to every portfolio we manage. We
firmly believe investment success is driven by the
identification and purchase of stocks trading at discounts
to their intrinsic values. In our opinion, the benefits of
this approach are evident in the long-term results we have
achieved.
* Material adopted from Charles
Brandes (2003).
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