The Business of Value Investing.pdf

176 The Business of Value Investing

to a search strategy. Even when the general level of equity prices are

elevated, serious value investors are diligently researching companies

and constantly learning so that they can more knowledgeable when

the next opportunity of bargain hunting arises.

Today, investors have the added advantage of being able to

search Securities and Exchange Commission documents via the

Internet and see what other well - regarded investors are buying and

selling. An effective search strategy that includes regularly checking

up on the quarterly portfolio holdings of more experienced inves-

tors can be an excellent source of ideas. Investing is a painstaking

process and will reward those willing to pursue it with a degree of

intensity.

After your search strategy has produced worthwhile ideas, then

comes the process of learning about the company and its opera-

tions, assessing the quality and competency of management, and

valuing the business. Obviously, this is the crucial step in the process

because investors cannot go any further without determining what

the business in worth. Remember that business valuation is part art

and part science and that all values are estimates. By defi nition, val-

uation process incorporates future operating results extrapolated

from the past performance of the business. Because the business

world and the stock market are both vulnerable to a host of shocks,

the valuation is always an estimate of intrinsic value; thus the need

for a margin of safety — investing only in those securities that are

selling for substantially less than intrinsic value. The ultimate value

of a business rests on how much future cash fl ow it can produce.

The intrinsic value of business is the sum of those future cash fl ows

discounted back to the present at an appropriate discount rate

combined with an appropriate terminal value. Of course, a business

also may be valued based on liquidation value or its value to a pri-

vate buyer, but these scenarios should be relied on only when com-

pelling analytical data justifi es the likelihood of either type of event

occurring.

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