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Today’s Value Investing

Warren Buffett speaking to a group of students...
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Today’s value investing is the same as the value investing taught by Benjamin Graham and practiced by the likes of Warren Buffett. The stock investing news is full of news and advice about today’s value investing. Fund managers are touting companies with strong balance sheets, lots of cash, and low price to earnings ratios as excellent investment prospects. Today’s value investing really is a return to the search for intrinsic value in stocks and a margin of safety between intrinsic value and current price. Wise investors are going back to the basics where intrinsic value is considered to be the discounted value of all future distributions. That’s right, distributions. This return to the basics demands that the company be making money, will likely keep making money, and will routinely pass money on to its shareholders in substantial quantities.

This return to the basics has a much less frantic quality to it that much of the frantic searching for short term profit that passed as investing prior to the most recent market crash. First of all today’s value investing, like that practiced for years, requires that the company already be making money and have cash, as well as being underpriced. The likes of land line telephone operator CenturyLink are often mentioned. Consolidating acquisitions of other land line operators the company is a cash cow. Although traditional phone service is slowly shrinking the transmission of data via DSL on land lines is growing. Therefore, CenturyLink’s pending acquisition of Qwest may well keep this company’s 8.8% dividend payments going into the indefinite future. Fundamental analysis to find intrinsic value in stocks is still the basic of value investing.

As usual we are not suggesting the purchase of CenturyLink or that readers go out and sell the stock. We are suggesting that readers consider the tools of value investing to profit in today’s stock market. The company is buying up assets in what is commonly considered a shrinking market. However, DSL use to transmit data is not shrinking and can provide cash flow for a long, long time. This is a good example of how picking new winners relies upon analysis of the company involved more than simply investing in a promising market sector. Today’s value investing harkens back to older principles of demanding that the company be solvent, producing profits, and well run. It also requires that, for whatever reason, the market is overlooking the company’s discounted value of all future distributions.

Today’s value investing does not have to do with knowing which penny stocks to watch. There certainly is room in any well thought out stock portfolio for a few shares of a company with the potential for stellar growth. However, it was packing portfolios full of leveraged investments and too many growth stocks without demonstrated ability to make money that destroyed the lifetime savings of many in the last market crash. Diversification is a key factor in successful investing and taking on some risk in order to obtain substantial profits is reasonable. However, having the bulk of one’s investments in value stocks has been the basis of long term market success for many wise investors.

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