Phil Town explains “Undervalued”.
Let me add one more thought regarding ‘undervalued’ for RULE #1 investors. My view of undervalued is formed from buying private businesses and venture capital investments. I don’t see it the way Wall Street sees it at all. Undervalued, to me, means the following:
First, that the business is predictable enough to get a solid valuation – this first requirement eliminates a lot of businesses simply because former river guides like me can only understand a few industries well enough to be comfortable. It eliminates a bunch more that I do understand, but which do not have historical numbers solid enough to base anything on. And yes, that means that I pass up a lot of investing opportunities that are getting turned around and are on their way up. But then if they really are, in a few years I will have an investment opportunity. Also, it means that I may buy a business that could crash without notice. Thank God for good RULE #1 indicators. They save me from my own ignorance.
Second, based on a predictable growth rate, the current market price is about half what it should be if I want a 15% return. Buying with that big of a margin of safety can prevent me from the darkness I wander into.
It all boils down to this: invest in stocks as businesses, understand the business so that you can know what the business is worth, and then wait for Mr. Market’s regular fluctuations to price it with a big margin of safety. This way of RULE #1 investing has worked for value investors for the last hundred years and it will be the basis of value investing for the next one hundred as well.
Let me add one more thought regarding ‘undervalued’ for RULE #1 investors. My view of undervalued is formed from buying private businesses and venture capital investments. I don’t see it the way Wall Street sees it at all. Undervalued, to me, means the following:
First that the business is predictable enough to get a solid valuation – this first requirement eliminates a lot of businesses simply because former river guides can only understand a few industries well enough to be comfortable, and it eliminates a bunch more that I do understand but which do not have historical numbers solid enough to base anything on. And yes, that means that I pass up a lot of investing opportunities that are getting turned around and are on their way up. But then if they really are, in a few years I will have an investment opportunity. And also, yes, it means that I am sometimes buying a business that is about to go crash without notice. Thank God for good RULE #1 indicators. They save me from my own ignorance.
Second, based on a predictable growth rate the current market price is about half what it should be if I want a 15% return. Buying with that big of a margin of safety also saves me from the darkness I wander in.
So it all boils down to this: invest in stocks as businesses, understand the business so that you can know what the business is worth, and then wait for Mr. Market’s regular fluctuations to price it with a big margin of safety. This way of RULE #1 investing has worked for the last hundred years and it will be the basis of investing for the next one hundred as well. (And we add one little modern strategy – we use the [Investools] arrows to protect ourselves from the Big Guys who can tank this overpriced market and our ‘undervalued’ stock along with i
Technorati Tags: Phil Town, phil town investing, phil town rule 1
Tags: Phil Town, phil town investing, phil town rule 1