Valuation

To get ahead, be creative.

No matter what a client desired, a good banker could always tweak the numbers a bit and could produce the numbers:

• a higher selling price,
• a lower purchase price, 
• stronger margins,
• lower capital costs.

Valuation Basics

Time Value of Money

Present Value   

Methods of Valuation

Valuation is far more of an art than a science.

"The value of that work is $1 million, because that is what the buyer and seller agreed on."

With detailed valuation models, the key factors that drove a company in the past, along with those which will continue to drive it in the future, can be examined.

Both sides are able to form a better picture of the potential as well as the risks associated with this company.

Through this process of dialogue, they hope to be able to build a consensus.  With a little luck, they just might close a sale.

There are numerous uses for valuation.   

A few of the more common ones are:

• Venture capital
• Initial public offerings
• Mergers and acquisitions
• Leveraged buyouts
• Estate and tax settlements
• Divorce settlements
• Capital raising.
• Partnerships
• Restructuring
• Real estates
• Joint ventures
• Project finance.

Even if you have no dealings in these types of transactions and more specifically, no interest in them, it is important to have at least a basic understanding of the underlying principles and techniques of valuation.

Why?   Because so much of what we do and so much of what governs out personal lives is driven by these principles.

• The simple decision to lease or buy a care is driven by valuation.
• The decision to own or rent an apartment is driven by valuation.
• Changes in the stock market that might affect your job are a function of valuation.

It is important that each one of us understand the basics of valuation because we no longer can rely on the experts on Wall Street, in corporate America, and at the big accounting firms.

Ultimately, we all bear some responsibility because we were the ones who failed to educate ourselves.

Various Methods of Valuation

• Replacement Method
• Capitalization of Earnings
• Excess Earnings Method
• Discounted Cash Flow Valuation
• Comparable Multiple Valuation
• Net Present Value
• Internal Rate of Return

Value investors consider the income statement and the balance sheet as sources of information concerning business value. These are superior to market-oriented tools such as the P/E ratio.

The most quoted metric in discussing common stocks is their ratio of price-to-earnings (P/E).  This states the relationship between what a stock costs and what benefit it produces.

Many people wrongly believe that value investing involves finding companies boasting low P/E multiples.

• But not all low P/E stocks are good investments, and not all high P/E stocks are bad investments.  
• Nor do value investors consider the P/E ratio as an insightful measure for valuation purposes, though it might be useful as a check against overpaying.  

Value investors resist the temptation to use P/E ratios as supplements to a traditional valuation analysis.  

• Value investors consider the income statement and the balance sheet as sources of information concerning business value.  
• These are superior to market-oriented tools such as the P/E ratio for two reasons.

1.  First, return on equity captures the full accounting picture, including debt and equity, whereas P/E severs earnings from the balance sheet.
2.  Second, return on equity is an intrinsic or internal valuation methodology, whereas P/E ratios are products of market or external or valuation processes.  

Market metrics tell value investors more than Graham's Mr. Market than about intrinsic value.  

How Buffett determined the combined value of Capital Cities and American Broadcasting

Murphy was named president of Capital Cities in 1964.  

Murphy agreed to sell Buffett 3 million shares of Capital Cities/ABC for $172.50 per share.

How Buffett determined the combined value of Capital Cities and American Broadcasting

Approximate yield of the thirty-year US government bond in 1985 = 10%.

Cap Cities had 16 million shares = 13 million shares outstanding plus 3 million issued to Buffett.

Market cap = 16 million x $172.50 = $ 2760 million

The present value (intrinsic value) of $ 2760 million of this business would need to have earnings power of $276 million.  ($2760 x 10%)

1984

Capital Cities earnings net after depreciation and capital expenditures = $ 122 million. 

ABC net income after depreciation and capital expenditures = $ 320 million.

Combined earnings power of these two companies = $ 442 million.

However, the combined company would have substantial debt:  the approximately $ 2.1 billion that Murphy was to borrow would cost the company $ 220 million a year in interest.

So, the net earnings power of the combined company = approximately $200 million.

Additional considerations

Capital Cities’ operating margins were 28%.

ABC’s operating margins were 11%. 

If Murphy could improve the operating margins of the ABC properties by one-third to 15%, the company would throw off an additional $125 million each year, and the combined earnings power would

= $ 200 million + $ 125 million

= $ 325 million annually.

The present value of a company earning  $ 325 million annually discounted at 10%

= ($325 million / 10%)

= $3250 million.

The per share present value of a company earning $ 325 million with 16 million shares outstanding

= $ 325 million / 16 million

=  $ 203 per share.

This gives a 15% margin of safety over Buffett’s $ 172.50 purchase price. 

The margin of safety that Buffett received buying Capital Cities was significantly less compared with other companies he had purchased.  So why did he proceed?

Murphy was Buffett’s margin of safety.   When Capital Cities purchased ABC, Murphy’s talent for cutting costs was badly needed.  With the help of carefully selected committees at ABC, Murphy pruned payrolls, perks, and expenses.  Once a cost crisis was resolved, Murphy depended on his trusted manager to manage operating decisions.  He concentrated on acquisitions and shareholders assets.

Appendix

The margin of safety that Buffett accepted could be expanded if we make certain assumptions.

1.  Buffett says that conventional wisdom during this period argued that newspapers, magazines, or television stations would be able to forever increase earnings at 6% annually - without the need for any additional capital.  The reasoning, explains Buffett, was that capital expenditures would equal depreciation rates and the need for working capital would be minimal.  Hence, income could be thought of as freely distributed earnings.  This means that an owner of a media company possessed an investment, a perpetual annuity, that would grow at 6% for the foreseeable future without the need for any additional working capital. 

Media company

Earned $ 1 million

Expected to grow at 6%.

The appropriate price to pay would be $25 million dollars for this business.

Calculation: 

Present value 

=  $ 1 million / (risk free rate of 10% - 6% growth rate)

=  $ 1 million / 4%

=  $ 25 million

Compare that, Buffett suggests, to a company that is only able to grow if capital is reinvested.  

Another business

Earned $ 1 million

Could not grow earnings without reinvested capital

The appropriate price to pay would be $ 10 million dollars for this business.

Calculation:

Present value 

=  $ 1 million / risk free rate of 10%

=  $ 10 million.

Apply the above to Cap Cities

Calculations:

6 million outstanding shares

Earned $325 million or $ 203 per share

Growth 6%

Risk free rate 10%

Present value = $325 million / (10% - 6%) = $ 8125 million

Per share value = $ 507 per share.

Present value increases from $ 203 per share to $ 507 per share.

Buffett paid $ 172.50 per share.  ($172.50 / $ 507 = 34%).  Therefore, he enjoyed a 66% margin of safety over the $172.50 price that Buffett agreed to pay.

But there are a lot of "ifs".

However, the margin of safety that Buffett received buying Capital Ciies was significantly less compared with other companies he had purchased. 

His ability to obtain a significant margin of safety in Capital Cities was complicated by several factors.  

1.  The stock price of Cap Cities had been rising over the years.  Murphy was doing an excellent job of managing the company, and the company's share price reflected this.  (So, unlike GEICO, Buffett did not have the opportunity to purchase Cap Cities cheaply because of a temporary business decline.  

2.  The stock market didn't help, either.  And, because this was a secondary stock offering, Buffett had to take a price for Cap Cities' shares that was close to its then-trading value.

Relative versus Absolute Valuation

Dear New Investor,

Take Andy Warhol’s “200 One Dollar Bills” silkscreen for example. This piece of art, which probably cost right around $200 to create sold for a staggering £26 million in late 2009. How can that price be justified?

To start, you could attribute much of the value to the Warhol name. Then you’d probably consider the meaning to the buyer, the piece’s importance relative to other works, and what someone else might pay for it down the road.

Using that same thought process, how would you justify the price tag of, say, £3, £4 or £5 for any particular share? There are many paths to the mountaintop, but all valuation techniques attempt to answer this question.

At Share Advisor, whether we’re looking at an income producing share or the next great growth story, we don’t want to overpay for a share. Not only does this reduce potential future gains – it increases our chances of losing money. That’s why any time we put money into a company’s shares, valuation will be a key part of the process.

Relative vs. Absolute

There are two major schools of thought when it comes to the valuation of shares:

1. Relative valuation: This is by far the most common type of valuation method in the market, for reasons I’ll discuss in a moment. With relative valuation methods, you’re comparing one company’s metrics (price-to-earnings, price-to-book, etc.) versus another company or the industry at large. For example, if there are two equally good companies, but one trades for ten-times earnings and the other for fifteen-times earnings, you would conclude that the company that trades for ten-times earnings is relatively undervalued.
2. Absolute valuation: The point of absolute valuation methods like the dividend discount (DDM) and discounted cash flow (DCF) models is to determine the “intrinsic” or fair value of a company, regardless of how its metrics stack up against competitors at a given time.

While the Share Advisor team may employ some relative valuation methods in our analysis, we’ll largely rely on absolute valuation to make our buy and sell decisions.

The Case For and Against Relative Valuation

According to Aswath Damodaran, a professor at New York University’s Stern School of Business, relative valuation is “pervasive”. He reckons that:

		Almost 85% of equity research reports are based on valuation multiples and comparables.
		More than 50% of all acquisition valuations are based on multiples.
		Rules of thumb based on multiples are not only common but are also often the basis for final valuation judgments.

If this doesn’t scare you, it should.

Why?

Because if most shares are trading at 30 times earnings, relative valuation could make a share trading at 25 times earnings appear undervalued and therefore worth buying.

But if it turns out that all shares are overpriced and should be trading at just 15 times earnings, you might lose money along with everyone else when the market declines. Your share wasn’t undervalued at all.

Despite its flaws, it’s easy to see why relative valuation is prevalent among City traders. Using relative numbers, analysts can always find undervalued shares (ever wonder why analysts can rate so many shares a buy?), and portfolio managers can always justify being fully invested at all times.

Because money managers make their bread by having assets under management, Warren Buffett aside, you won’t find many of them saying, “I can’t find anything to buy, so it’s time to cash out.”

Finally, when your own performance is judged relative to other analysts and portfolio managers, it’s much safer to ride with the herd and make relative valuations. After all, you only need to be marginally better than your peers to become a star. On the other hand, if you deviate from the herd and are proven wrong, you’re often wrong alone and your time as an analyst will likely be short-lived.

To borrow a lesson from childhood, remember that what’s right is not always popular, and what’s popular is not always right.

Sticking to Fundamentals

The inherent volatility spawned by this irrational behaviour creates opportunities for business-focused investors with longer time horizons.

At Share Advisor, we stick to the business fundamentals – think profits and cash flows – to estimate a share’s intrinsic value. By taking this approach though, we implicitly assume three things:

1.		That the market can be irrational in the short term.
2.		That we have something the market doesn’t have.
3.		That the market will eventually correct itself.

I think many people would agree on the first point that the market can be irrational. As for the second point, the individual investor’s greatest advantage over the market is our ability to be patient and remain focused on an investment’s underlying business, regardless of the market’s happy days or temper tantrums.

This type of patience is uncommon. The average holding period for a FTSE share is just7 months, according to a September 2010 speech given by Andy Haldane of The Bank of England. That’s down from eight years in the 1960s.

That’s not investing; that’s trading.

When we buy a share at Share Advisor, we plan to own it for at least three years, or as long as the valuation and business make it worth owning. In fact, the longer our time horizon, the better our chances should be of being proven correct – by giving the market more time to revert to what we regard as the company’s proper value (and meanwhile, a growing, fundamentally strong company should continue to add value).

So as long as we can stay patient, we should have a distinct advantage over other investors.

This leads us to our third point, which is the biggest assumption because it requires a catalyst that’s beyond our control. Whether it’s a positive earnings report, a change in management, or an unexpected event, an undervalued stock can’t reach its fair value without something knocking some sense back into the market.

Admittedly, the longer we need to wait for the market to recognize a company’s fair value, the more trying it becomes to hold onto the position, especially if the share continues to underperform. To resist our human tendencies to follow the herd, we deliberately review our businesses’ fundamentals to determine whether we should keep holding our shares.

Using Share Advisor Valuations

In all of our Share Advisor buy reports, we give you our estimate of the fair value for the company and a preferred price at which to buy the share (though if you can get in lower, that’s generally better). The numbers are our best estimates at the time – so they’re not set in stone. Sometimes following good results our forecast will improve later, and we’ll tell you when that happens, whilst other times it will decline.

There’s no such thing as a precise valuation. Every estimate of fair value is just that – an estimate which attempts to weigh the probabilities of various good and bad scenarios that could befall a company and its shares. Measuring probability accurately is pretty tricky and sticking too tightly to an estimate of value runs the risk of creating a false sense of precision. I would be wary of any analyst that provides you a value estimate down to the pence for a share – it is just unreasonable to expect that level of accuracy from any valuation method.

The uncertainty around our estimates of value is one of the reasons we require a meaningful margin of safety (usually around 20%) from our estimated fair value before recommending a share.

Our preferred buy price isn’t the be-all and end-all either. If a share is trading just above our preferred buy price, that shouldn’t stop you from buying it if you want to – remember, we’re giving you our best estimate of fair value and estimates are fuzzy, so applying overly strict buy limits creates another opportunity for false precision.

By taking a long-term, business-focused approach to valuing shares, we should have a distinct advantage in an irrational market. Over time, we expect it will help us build a diverse portfolio that generates superior income as well as winning returns.

Motley Fool

Buffett's and Shiller's stock valuation methods agree

MONDAY, FEBRUARY 09, 2009

Buffett's and Shiller's stock valuation methods agree

Carol Loomis of Fortune has a new article out saying that Warren Buffett's valuation metric says it's time to buy stocks. I decided to compare Warren Buffett's stock valuation metric with Robert Shiller's. They both compare nicely.
Warren Buffett's stock valuation metric: Total stock market value as a percent of GNP.
Yale economist Robert Shiller's stock valuation metric, based on Benjamin Graham's advice in Security Analysis: S&P 500 10-year price/earnings ratios.

Robert Shiller doesn't compare the S&P 500 only to its current year earnings. Instead, he compares it to the average of the past ten years, adjusted for inflation. This way, he avoids getting fooled when single-year corporate earnings rise and fall with the business cycle.
Although Warren Buffett's and Robert Shiller's valuation methods are entirely different, they both seem to track each other fairly nicely. Knowing what happened in 1929, however, it looks like Robert Shiller's valuation method is slightly better than Warren Buffett's.

http://bubblemeter.blogspot.com/2009/02/buffetts-and-shillers-stock-valuation.html

Fed Model of Stock Market Valuation

Fed Model of Stock Market Valuation

Greenspan's testimony in his semiannual address to Congress in 1997 suggested that the central bank regarded the stock market as overvalued whenever this earnings yield fell below the bond rate and undervalued whenever the reverse occurred.

The basic idea behind this Fed model is that bonds are the chief alternative for stocks in investors' portfolio.

• The return on a bond can be termed the interest yield.
• The return on stocks is termed the earnings yield.
• When the interest yield rises above the earnings yield, stock prices fall because investors shift their portfolio from stocks to bonds.
• On the other hand, when the interest yield falls below the stock yield, investors move into stocks, boosting their price.

Institutions have been using the relation between interest yields and stock yields to determine their asset allocations for many years.

What is unique about the Fed model is that it directly compares these two yields rather than just noting a correlation between them.

The Fed model appears to have worked fairly well since 1970. When interest rates fell, stocks rallied to bring the earnings yield down, and the opposite occurred when interest rates rose.

What is surprising is that this relation holds despite the fact that stocks and bonds are very different assets. The reason why the Fed model works is that the market rates these two advantages as approximately of equal value when inflation is an important factor.

There is no question that both bonds and stocks do badly when inflation increases.

• Bond prices fell in the late 1960s and 1970s because rising inflation forced interst rates up to offset the depreciating value of money.
• Inflation was accompanied by an increase in energy costs, poor productivity growth and poor monetary policy. Therefore, inflation depresses corporate profits and real stock returns.
• Finally, inflation increases uncertainty and raises the threat of central bank tightening of money policy to halt rising consumer prices. This is also negative for stocks.

Falling interest rates boosted both stock and bond prices as economic growth increased. The 1980s amd 1990s were good decades for both stocks and bonds as inflation declined from its record high levels.

However, both history and theory suggest that the Fed model breaks down when inflation is very low or when consumer prices are stagnant and deflation threatens. In such circumstances, bonds (especially risk-free government bonds) will do very well, but stocks returns will be ambiguous.

Given that interest rates and inflation have now shrunk to their lowest level in four decades, stock investors should be wary of using the Fed model.

• Stocks still will welcome any Fed reduction in interest rates, but declines in long-term government bond rates often signal strong deflationary or recessionary forces. It will be harder under these circumstances for firms to raise their output prices to cover costs. Deflation undermines firms' pricing power, and this cuts into profit margins.
• Moreover, because it is extremely difficult for firms to negotiate nominal wage cuts, deflation increases real wage costs and reduces profits. Thus nominal assets such as bonds will shine under deflation, whereas real assets often suffer.

Unless inflation heads upward again, it is unlikely that the tight correlation experienced over the past two decades between these two yields will continue.

• In a low-inflation world, pricing power and earnings potential will dominate stock valuations, whereas bonds will be valued for their ability to hedge deflationary risk.
• Rising and falling interest rates still will be very important determinants of stock prices in the very short run but long-run patterns are apt to diverge as investors recognize the fundamental differences in the assets.

Additional notes:
Present market PE of KLSE is around 15, giving an earnings yield of 6.7%.
The interest rate is about 3%.

Business Valuations versus Stock-Market Valuations (2) - an illustration

"The company is worth more dead than alive."


The A&P Example

This example combines many aspects of corporate and investment experience. It involves the Great Atlantic & Pacific Tea Co. Here is the story:

1929: First traded on the "Curb" market, now the American Stock Exchange

1929: Sold as high as 494
1932: Declined to 104, although the company's earnings were nearly as large in that generally catastrophic year as previously.
1936: The range was between 111 and 131.
1938: In business recession and bear market. Fell to a new low of 36

The $36 price was extraordinary.

It meant that the preferred and common shares were together selling for $126 million.

The company had just reported that it held $85 million in cash alone and a working capital (or net current assets) of $134 million.

A&P was the largest retail enterprise in America, if not in the world, with a continuous and impressive record of large earnings for many years.

Yet, in 1938 this outstanding business was considered on Wall Street to be worth less than its current assets alone - which means less as a going concern than if it were liquidated.
(Better dead than alive!)

Why?

First, because there were threats of special taxes on chain stores.
Second, because net profits had fallen off in the previous year.
Third, because the general market was depressed.

The first of these reasons was an exaggerated and eventually groundless fear; the other two were typical of temporary influences.

----------

Let us assume that the investor had bought A&P common in 1937 at, say, 12 x its five-year average earnings, or about $80.

We are far from asserting that the ensuing decline to 36 was of no importance to him.

He would have been well advised to scrutinize the picture with some care, to see whether he had made any miscalculations.

But if the results of his study were reassuring - as they should have been - he was entitled then

• to disregard the market decline as a temporary vagary of finance,
• unless he had the funds and the courage to take advantage of it by buying more than the bargain basis offered.

SEQUEL AND REFLECTIONS.

1939: A&P shares advanced to 117 1/2.

This was 3 x the low price of 1938 and well above the average of 1937.

Such a turnabout in the behaviour of common stocks is by no means uncommon, but in the case of A&P, it was more striking than most.

1949-1961: The grocery chain's shares rose with the general market.

1961: The split-up stock (10 for 1) reached a high of 70 1/2 which was equivalent to 705 for the 1938 shares.

This price of 70 1/2 was remarkable for the fact it was 30 times the earnings of 1961.

Such a PE ratio - which compares with 23x for the DJIA in that year - must have implied expectations of a brilliant growth in earnings.

This optimism had no justification in the company's earnings record in the preceding years, and it proved completely wrong. Instead of advancing rapidly, the course of earnings in the ensuing period was generally downward.

1962: The year after the 70 1/2 high the price fell by more than half to 34.

But this time the shares did not have the bargain quality that they showed at the low quotation in 1938.

1970: The price fell to another low of 21 1/2/
1972: The price was 18, having reported the first quaterly deficit in its history.

--------

We see in this history how wide can be the vicissitudes of a major American enterprise in little more than a single generation, and also with what miscalculations and excesses of optimism and pessimism the public has valued its shares.

In 1938 the business was really being given away, with no takers.

In 1961, the public was clamoring for the shares at a ridiculously high price.

After that came a quick loss of half the market value, and some years later a substantial further decline.

In the meantime, the company was to turn from an outstanding to a mediocre earnings performer; its profit in the boom-year 1968 was to be less than in 1958; it had paid a series of confusing small stock dividends not warranted by the current additions to surplus; and so forth.

A&P was a larger company in 1961 and 1972 than in 1938, but not as well-run, not as profitable, and not as attractive.

1999: At year-end, its share price was $27.875
2000: $7.00
2001: $23.78
2002: $8.06

Although some accounting irregularities later came to light at A&P, it defied all logic to believe that the value of a relatively stable business like groceries could fall by three-fourths in one year, triple the next year, then drop by two-thirds the year after that.

---------

There are two chief morals to this story.

The first is that the stock market often goes far wrong, and sometimes an alert and courageous investor can take advantage of its patent errors.

The other is that most businesses change in character and quality over the years, sometimes for the better, perhaps more often for the worse.


The investor need not watch his companies performance like a hawk; but he should give it a good, hard look from time to time.


Ref: Intelligent Investor by Benjamin Graham

Business Valuations versus Stock-Market Valuations

The impact of market fluctuations upon the investor's true situation may be considered also from the standpoint of the shareholder as the part owner of various businesses.

The holder of marketable shares actually has a double status, and with it the privilege of taking advantage of either at his choice.

(1) As a minority shareholder or silent partner in a private business.

Here his results are entirely dependent on the profits of the enterprise or on a change in the underlying value of its assets.

He would usually determine the value of such a private business interest by calculating his share of the net worth as shown in the most recent balance sheet.

(2) As a common-stock investor.

He holds a piece of paper, an engraved stock certificate, which can be sold in a matter of minutes at a price which varies from moment to moment - when the market is open, that is - and often is far removed from the balance sheet value.

(Stocks now exist, for the most part, in purely electronic form and thus have become even easier to trade than they were in Graham's day).

The development of the stock market in recent decades has made the typical investor more dependent on the course of price quotations and less free than formerly to consider himself merely a business owner.

The reason is that the successful enterprises in which he is likely to concentrate his holdings sell almost constantly at prices well above their net asset value (or book value, or "balance sheet value"). [# Book Value (Net Asset Value) ]

In paying these market premiums the investor gives precious hostages to fortune, for he must depend on the stock market itself to validate his commitments.



A factor of prime importance in present-day investing.

The whole structure of stock-market quotations contains a built-in contradiction.

The better a company's record and prospects, the less relationship the price of its shares will have to their book value.

But the greater the premium above book value, the less certain the basis of determining its intrinsic value - i.e , the more this "value" will depend on the changing moods and measurements of the stock market.

Thus, we reach the final paradox, that the more successful the company, the greater are likely to be the fluctuations in the price of its shares.

This really means that, in a very real sense, the better the quality of a common stock, the more speculative it is likely to be - at least as compared with the unspectacular middle-grade issues.

(What we have said applies to a comparison of the leading growth companies with the bulk of well-established concerns; we exclude from our purview here those issues which are highly speculative because the businesses themselves are speculative.)

The argument made above should explain the often erratic price behaviour of our most successful and impressive enterprises.

For example
- IBM (International Business Machines).
The price of its shares fell from 607 to 300 in seven months in 1962-63; after two splits its price fell from 387 to 219 in 1970.
-Xerox - an even more impressive earnings gainer in recent decades - fell from 171 to 87 in 1962-63, and from 116 to 65 in 1970.

These striking losses did not indicate any doubt about the future long term growth of IBM or Xerox; they reflected instead a lack of confidence in the premium valuation that the stock market itself had placed on these excellent prospects.



The previous discussion leads us to a conclusion of practical importance to the conservative investor in common stocks.

If he is to pay some special attention to the selection of his portfolio, it might be best for him to concentrate on issues selling at a reasonably close approximation to their tangible-asset value - say, at not more than 1/3 (one-third) above that figure.

Purchases made at such levels, or lower, may with logic be regarded as related to the company's balance sheet, and as having a justification or support independent of the fluctuating market prices.

The premium over book value that may be involved can be considered as a kind of extra fee paid for the advantage of stock-exchange listing and the marketability that goes with it.




A caution.

A stock does not become a sound investment merely because it can be bought at close to its asset value.

The investor should demand, in addition,
1. a satisfactory ratio of earnings to price (PE),
2. a sufficiently strong financial position, and
3. the prospect that its earnings will at least be maintained over the years.

This may appear like demanding a lot from a modestly priced stock, but the prescription is not hard to fill under all but dangerously high market conditions.

Once the investor is willing to forego brilliant prospects - i.e., better than average expected growth - he will have no difficulty in finding a wide selection of issues meeting these criteria.

(In the present market situation, may stocks meet this asset-value criterion. Many sell below their tangible-asset value. Many are now available at prices reasonably close to their asset values.)

The investor with a stock portfolio having such book values behind it can take a much more independent and detached view of stock-market fluctuations than those who have paid high multipliers of both earnings and tangible assets.

As long as the earning power of his holdings remains satisfactory, he can give as little attention as he pleases to the vagaries of the stock market.

More than that, at times he can use these vagaries to play the master game of buying low and selling high.


Ref: Intelligent Investor by Benjamin Graham