Value Investing Program – Phase I (Four Core Principles)

The defacto number one tenet of business is to buy low and sell high. This tenet is exactly what value investing is all about. This buy low, sell high tenet has four core principles that all value investors must adhere to in order to be successful. They are as follows:

The first principle of value investing focuses on risk reduction. The market gives more credibility to stronger and more stable companies. There are more than 10,000 companies traded on US stock exchanges including the over-the-counter market. The number one tool to reduce risk is to only review and invest in the top 2,000 publicly traded companies in the United States. These are commonly referred to as DOW, S&P 500, S&P Composite 1500 and some of the Russel 2,000 listed companies. This tier of operations are referred to as Large and Mid-Capitalization companies. In effect, their market valuation exceeds $5 Billion. Not all of them qualify, there are some rules that will disqualify some of these companies. But the key to risk reduction is to stick to this group as the investment selection for a value investor’s portfolio.
The second principle picks up from the primary principle and then further refines risk reduction by establishing an extreme point of a price to pay for the respective security. This is referred to as intrinsic value. But there is more. A value investor will set a buy price with a margin of safety from intrinsic value. This is essentially a discounted price from intrinsic value. There are numerous factors that impact this discounted value from intrinsic value, some are relatively small such as three to eight percent. Others are quite steep with discounts of more than 15% from intinsic value. Notice how the first two principles focus on the ‘Buy Low’ part of the primary business tenet?
The third principle focuses on the ‘Sell High’ component of the primary business tenet. Here, this principle advocates proper financial analysis of securities to determine the most probable market recovery price and the expected recovery time frame. There are several approaches for investor to determine this expected market recovery price for the security once it is purchased at a low price. Tools used include financial statement analysis, the historical record of the security and the industry’s overall performance and review. For this principle, financial analysis is explained and identification of key ratios will provide the assurance of a fast and successful recovery.
The last principle actually is used for the entire ‘buy low, sell high’ tenet. It is patience. Patience is required to buy the stock low and have faith in one’s analysis that indeed the market price for the security will recover to the preset sell point. This particular principle is the most difficult for value investors. Most investors do not have the necessary self control to wait out the market. Anxiety, greed, and impulsive behavior are the enemies of patience. Learning how patience pays off is instrumental with successful value investing.

There are 18 lessons in this phase of the program. Lessons one through five explain the overall approach to investing. Here, the most importance concept to understand for the investor is that value investing is a methodical approach to generating wealth. IT IS NOT A GET RICH QUICK SCHEME. Investing requires thinking and adherence to the four core principles. Lessons six through nine cover each principle individually. Lessons ten through twelve introduce how financial information is compiled and evaluated as a value investor. Lessons thirteen through eighteen explain why pooling of investments is so beneficial to a portfolio of possible investments. This pooling concept is the precursor to understanding the impact industry standards have with financial information and how the investment fund is monitored.

After reading and understanding the first 18 lessons, members are allowed access to additional tutorials, spreadsheets and some deep information articles related to these four core principles.

Once this introduction phase is completed, the student is now ready to go to Phase II of this program. Phase II digs deep into understanding financial analysis and how it creates the necessary knowledge and confidence with a value investors investment decision model.

For those of you interested in a video introduction, please click on the YouTube upload on the left to take you to my video tutorials.

The lessons, tutorials, webinars, white papers, spreadsheets on this site are designed to teach these four principles. In addition, this site has over 600 supporting articles that augment the lessons and the program. It is effectively the best resource center available to learn about and implement a personal value investment fund. The annual goal is to achieve 30% plus returns.

Value Investing – Key Performance Indicators (Lesson 11)
All of us use indicators everyday to help us manage our lives. These indicators assist us with making good decisions. This same concept exists with stock investments. There are several different indicators related to stock. Most of them are financial in nature and often summed up via business ratios. However, many of the top companies ...
Value Investing – Business Ratios (Lesson 12)
Business ratios are used to compare similar companies within the same industry. RULE #1: DO NOT USE BUSINESS RATIOS TO COMPARE COMPANIES AGAINST EACH OTHER IF THEY ARE IN DIFFERENT INDUSTRIES. Business ratios are not perfect, they have their respective flaws and it is important for value investors to understand the algorithms used with business ratios. ...
Value Investing – Industry Standards (Lesson 13)
Have you ever wondered how the measurement of length called a ‘meter’ came to be? It is simply the distance light travels in a given time period. The key isn’t the actual definition, it is whom dictates this time period of travel. Some authority states that this is the definition of a meter (also written ...
Value Investing – Pools of Investments (Lesson 14)
Value investors utilize pools of similar companies all belonging to the same industry in order to reduce risk, create accurate buy/sell models and manage their portfolio of investments in their investment fund. It is essential that all potential investments in a pool have similar attributes including market capitalization, comparable operations, indistinguishable balance sheet relationships and ...
Value Investing – Investment Fund (Lesson 15)
An investment fund is a collection of capital from one or more individuals and is used to purchase financial instruments of various companies or other funds. The most common types are brokerage funds that allow incremental purchases from members. These funds are often dedicated to a certain group or type of investment. These groups or ...
Value Investing – Setting Buy and Sell Points (Lesson 16)
Setting buy and sell points for any investment security determines the investment’s final return. If the buy is made too early while the security is falling in price, the value investor loses out on not only additional margin upon the sale of that security, but also reduces their margin of safety associated with the intrinsic ...
Value Investing – Monitoring Performance (Lesson 17)
Monitoring performance is the single best tool to ensure success with value investing. Comparing results against expectations provides the basis for good decisions. In business, this is known as the feedback loop. In effect, a variable input is changed, results are recorded, compiled and reported in a understandable format. Any unexpected results are analyzed and ...
Value Investing – Churning (Lesson 18)
Churning refers to agitating. It is commonly used with the dairy industry to refer to the process of turning liquid cream into butter. The churning process breaks down the fat membranes allowing the fats to join together. In effect, churning means to work the liquid into a solid. With investing, churning has two different connotations. ...