Value Investing For Dummies

Peter J. Sander, Janet Haley

• Publisher: For Dummies
• Year: 2011
• ISBN:
  9781118052280
• Edition: 2
• Topic: Negocios y empresa
• Subtopic: Inversiones y valores

Want to follow in Warren Buffett's investing footprints? Value Investing For Dummies, 2nd Edition, explains what value investing is and how to incorporate it into your overall investment strategy. It presents a simple, straightforward way to apply proven investment principles, spot good deals, and produce extraordinary returns.

This plain-English guide reveals the secrets of how to value stocks, decide when the price is right, and make your move. You'll find out why a good deal is a good deal, no matter what the bulls and bears say, get tips in investing during jittery times, and understand how to detect hidden agendas in financial reports. And, you'll uncover the keys to identifying the truly good businesses with enduring and growing value that continually outperform both their competition and the market as a whole. Discover how to:

• Understand financial investments
• View markets like a value investor
• Assess a company's value
• Make use of value investing resources
• Incorporate fundamentals and intangibles
• Make the most of funds, REITs, and ETFs
• Develop your own investing style
• Figure out what a financial statement is really telling you
• Decipher earnings and cash-flow statements
• Detect irrational exuberance in company publications
• Make a value judgment and decide when to buy

Complete with helpful lists of the telltale signs of value and "unvalue, " as well as the habits of highly successful value investors, Value Investing For Dummies, 2 nd Edition, could be the smartest investment you'll ever make!

Part I

The What and Why of Value Investing

In this part . . .

We hope to give a clear picture of what value investing is and isn’t and also provide a framework for the rest of the book. We put value investing in context with a discussion of markets, market history, and overall performance, with an emphasis on market nature –– key market behaviors and quirks that repeatedly, through history, provide opportunities for the value investor. We explore the history of the value investing approach and the fantastic success of some who practice it, notably the master himself, Warren Buffett.

Chapter 1

An Investor’s Guide to Value Investing

In This Chapter

Recognizing the value investing style — what it is and isn’t

Bottom-line value investing principles

Comparing value investing to other investing styles

Deciding if you’re a value investor

No doubt, if you’re reading Value Investing For Dummies, somewhere during your investing career you heard something about value investing. You heard about it from your retired next-door neighbor. You heard about it as “what Warren Buffett does.” You saw a mutual fund describe itself as a “value-oriented” fund.

You have a pretty good idea what the word “value” means in ordinary English. It’s not an altogether precise concept; the Random House Dictionary of the English Language defines it as the “relative worth, merit, or importance” of something. Okay, fine. But how does that apply to investing? What is value investing, anyway?

This chapter answers that question. The rest of this book gives you the background, tools, and thought processes to do it.

Definitions? No Two Are Alike

Perhaps you’ve asked around — to friends, experienced investors, investing professionals — for definitions of “value investing.” You probably got a lot of different answers. Those answers perhaps included phrases like “conservative,” “long-term oriented,” “the opposite of growth,” “the Buffett approach,” “buying stocks with a low P/E,” “buying stuff that’s cheap,” or “buying stocks that nobody wants.”

None of these is “it” entirely, but it turns out they are all part of it.

All, except the “opposite of growth,” that is — and we’ll get to that.

Value investing is an investing approach and style blending many principles of business and financial analysis to arrive at good investing decisions. This, too, is an imprecise definition, but it lays the groundwork for the more precise principles and style points that follow.

What Is Value Investing?

Toward a definition, here’s one you may have read in the first edition of Value Investing For Dummies. It still works:

Value investing is buying shares of a business as though you were buying the business itself. Value investors emphasize the intrinsic value of assets and current and future profits, and pay a price equal to or less than that value.

You’ll quickly note key phrases: “buying a business,” “intrinsic value,” and “pay a price equal to or less than that value.” These are explicit tenets of the value investing approach, and underlying them all is the notion of conscious appraisal — that is, the idea of a rigorous and deliberate attempt to measure business value.

You’ll also notice that “price” enters the appraisal, but not until the end. Value investors only go to the stock market to buy their shares of the business. Value investors don’t look at the market as an indicator of whether to invest.

With this definition of value investing as an appetizer, here’s a “main course” of value investing principles.

Buying a business

If you take nothing else away from reading this book, take away the thought process that investing in stocks is really (or should be) like buying a business.

That concept shouldn’t really be that hard to grasp — after all, when you buy shares, you are buying a portion of a business, albeit in most cases a small one. This isn’t to say you have to buy a larger share of the business to think of your investment as buying a business — this principle applies even if you’re buying a single share.

Put differently, whether it’s an espresso cart or 1,000 shares of Starbucks you want to buy, the purchase is analyzed the same way. Treat the investment as if you were buying the business — the whole business. By buying shares, you’re committing capital to that enterprise in exchange for an eventual healthy and appropriate return on that investment.

Now, some of you who got caught in the tech boom and bust may think you did exactly that. You followed a company and its story. The products were “killer apps” and everything the company did made headlines. Everybody wanted to own its products or work for the company. So you bought shares.

But did you look at business fundamentals? Intrinsic value of assets and future profit prospects? Did you understand their strategy and competitive advantages? Did you do your homework to assess whether the stock price was at or below your appraisal? Likely not. That’s the difference between value investing and most other forms of investing.

Making a conscious appraisal

If you were interested in buying a business for yourself and thought the corner hardware store looked attractive, how much would you be willing to pay for it? You would likely be influenced by the sale price of other hardware stores and by opinions shared by neighbors and other customers. But you would still center your attention on the int...