Use the financial figures quickly

Financial data should help you survive tough times and it will be more valuable if you can get it quickly and use it quickly.

It is sometimes better to have slightly inaccurate or incomplete information quickly than perfect information some time later.

Talk this over with your financial colleagues.  Make time to look at it and act on it when it comes.

The essential point in security analysis is to establish that the value is adequate

Businesses, unlike debt instruments, do not have contractual cash flows.  As a result, they cannot be as precisely valued as bonds.  

Benjamin Graham knew how hard it is to pinpoint the value of businesses and thus of equity securities that represent fractional ownership of those businesses.  In Security Analysis he and Dodd discussed the concept of a range of value.

'The essential point is that security analysis does not seek to determine exactly what is the intrinsic value of a given security.  It needs only to establish that the value is adequate - e.g., to protect a bond or to justify a stock purchase - or else that the value is considerably higher or considerably lower than the market price.  For such purposes an indefinite and approximate measure of the intrinsic value may be sufficient.'

Indeed, Graham frequently performed a calculation known as net working capital per share, a back-of-the-envelope estimate of a company's liquidation value. His use of this rough approximation was a tacit  admission that he was often unable to ascertain a company's value more precisely.

Business value cannot be precisely determined: Be approximately right than be precisely wrong

Many investors insist on affixing exact values to their investments, seeking precision in an imprecise world, but business value cannot be precisely determined.

• Reported book value, earnings, and cash flow are, after all, only the best guesses of accountants who follow a fairly strict set of standards and practices designed more to achieve conformity than to reflect economic value.  
• Projected results are less precise still.  

You cannot appraise the value of your home to the nearest thousand dollars.  Why would it be any easier to place a value on vast and complex businesses?

Not only is business value imprecisely knowable, it also changes over time, fluctuating with numerous macroeconomic, microeconomic, and market-related factors.  So while investors at any given time cannot determine business value with precision, they must nevertheless almost continuously reassess their estimates of value in order to incorporate all known factors that could influence their appraisal.

Any attempt to value businesses with precision will yield values that are precisely inaccurate.  The problem is it is easy to confuse the capability to make precise forecasts with the ability to make accurate ones.

Value assessment does not rely on precision

Investing is the intention to seek a required rate of return (RR) relative to risk, based on an assessement of value.

The deployment of capital in the absence of assessment of value is called speculation.

Value investing can be defined as buying a share at a price lower than its calculated value. Only investors who have the ability to calculate value can call themselves "value investors"

The very factor on which investing is based, namely value, is little understood, and therefore nearly always ignored.

Warren Buffett once said: "I'd rather be approximately right than precisely wrong."

Stock valuation is subjective in that it requires a judgement of the sustainability of past profitability and is therefore far from being an exact science. Like price, value will not increase in neat, even increments year after year, but will vary with the changing fortunes of the business.

An assessment of value is determined by making forward assumptions of a business's performance based on its historical performance. Depending on the current outlook for the business and its future prospects, the adopted performance criteria (APC) may differ from thsoe that past performance indicates. One also needs to make an assessment of the RR to compensate for many factors. The adopted assumptions are then used to calculate the value, the preciseness of which is not as important as being, as Buffett suggests, "approximately right."

As essential as valuation is in determining the margin of safety between value and price, other factors need to be considered when deciding whether a stock should be bought or sold.

The argument that value is misleading because it infers precision is as foolish as suggesting that real estate valuations are a waste of time because they too imply precision.

A recommendation may be correct, but unless it is accompanied by evidence of value, it can be considered only an unjustified expression of opinion.

Investing in stocks is not about buying scrip that will go up and down in price, but about investing long term in a sound business that represents good value at its present price.