In this series of articles we will provide some insight into how we value the companies that we select in our Renting Shares, Protected Equity and Credit Spread Portfolios.

Let’s begin this series of articles by discussing exactly what we mean when we say we use the process of ‘Value Investing’ to choose stocks and invest our money.

What is Value Investing?

In its simplest form it is buying something for less than what you believe its worth.  There are no hard and fast rules on how you get to that point, as there are many subjective factors that go into valuing a company.  What we do know is that there are a few people that do it very well and by emulating their valuation processes we can increase our chances of identifying undervalued stocks.

So who uses it?

Ben Graham in his book “The Intelligent Investor” (1949) first introduced the concept of value investing.  These principles have since been adopted and refined by many successful investors.  Some of the better know investors are Warren Buffet and his business partner Charlie Munger.

Whilst successful investing is a lifelong learning process there are some components that you can learn easily enough in a short period of time.

Components of Value Investing

Some of the components of Value Investing that we use include:

-          Evaluating the Balance Sheet: asset quality, debt position, cash and liquid assets, equity, dividends and an assessment of the overall quality and reliability of those numbers.

-          Evaluating the Profit & Loss Statement: quality of earnings and its trends, price to earnings ratio, how companies can pump up profit and why you need to look at all three statements to understand how a company has performed.

-          Evaluating the Cashflow Statement: operating cashflow and how we can use that to identify whether a company is really increasing net worth or just generating internal profits.

-          Management: experience, history, ownership of company, reliability and integrity.

-          Graham’s 10 components to identify an undervalued stock.

-          A case study going step by step through a company we have identified as undervalued.  We will show you exactly what we do including qualitative and quantitative analysis using the components discussed above.

Over the coming weeks we will go through these components of Value Investing.  To be notified of these articles as they are published you can subscribe to the RSS feed at www.planetwealthblog.com.au