You, the Business Owner

If you were buying a business, would you look at market timing, technical analysis, macroeconomic indicators? Probably not. Value investors approach valuation with a business owner’s perspective as if they were going to buy the company. As Graham stated in The Intelligent Investor, “Investment is the most intelligent when it is the most businesslike.” In other words, if you set out to make profits in investing, then you are embarking on a business venture of your own, so treat it as such.

Taking a business owner’s perspective entails knowing what one is doing, and asking the sort of questions and getting relevant answers that will allow the value investor to determine a fair price for the business. Questions like – What is the income of this business? Is it reliable income? Has income been growing steadily over the years? Is the company on a solid footing or languishing towards bankruptcy due to heavy debt, or is it flush with cash that might make it a potential takeover target? Does it produce a consistent and growing return on shareholder equity? Does it have a wide moat? Does it make a product or products that will continue to be in demand? Does it have a consumer monopoly and plenty of free cash flow?

Answers to these questions will allow the value investor to determine an intrinsic value for the company. An important ideal here is to do this yourself and “Do not let anyone else run your business” – i.e. the value investor must take responsibility for his/her own actions and investment decisions.

Graham gives a third principle of businesslike investing – “Do not enter upon an operation — that is, manufacturing or trading in an item — unless a reliable calculation shows that it has a fair chance to yield a reasonable profit.” When the value investor limits his return to a small figure, he/she must be sure and demand substantial evidence that doing so is not putting excessive capital at risk.

Finally, a value investor must possess the businesslike principle of having the courage of his own convictions, and the courage to act on any conclusions he makes from a detailed study and knowledge of the facts. This should be regardless of whether or not others agree with such conclusions.

In the next article in the series we take a closer look at Intrinsic Value.