Understand the inportance of Margin of Safety.
Essential to Benjamin Graham and Warren Buffett was the concept of margin of safety in an investment. If a stock's price is well below its' intrinsic value, then there is a margin of safety by default. This golden rule of value investing was been a central tenet for many years.
Benjamin Graham was the father of securities analysis and taught the principles to many students at Cornell University, including an eager to learn teen Warren Buffett. Once you knew the value of a company, then it was easy to deduce what investment decision to make.
Prior to Graham's seminal work, there were no standard methods of valuing companies.
In Security Analysis, Graham wrote that intrinsic value was "that value which was determined by the facts." The facts involved dissecting the company's earnings and assets, and making a guess a the future earnings. The future earnings were the toughest to calculate, but the most important because they helped give the analyst the information needed to determine the intrinsic value and the margin of safety.
He framed the intrinsic value thus: estimated future earnings multiplied times a capitalization factor that was derived from the company's earnings and assets as well as the balance sheet.
Graham knew that the intrinsic value was imprecise and that some amount of uncertainty existed in using it. Despite that, he felt it was a superior way of valuing securities.
As long as you knew the intrinsic value of a company, you could easily calculate the margin of safety.
Benjamin Graham was the father of securities analysis and taught the principles to many students at Cornell University, including an eager to learn teen Warren Buffett. Once you knew the value of a company, then it was easy to deduce what investment decision to make.
Prior to Graham's seminal work, there were no standard methods of valuing companies.
In Security Analysis, Graham wrote that intrinsic value was "that value which was determined by the facts." The facts involved dissecting the company's earnings and assets, and making a guess a the future earnings. The future earnings were the toughest to calculate, but the most important because they helped give the analyst the information needed to determine the intrinsic value and the margin of safety.
He framed the intrinsic value thus: estimated future earnings multiplied times a capitalization factor that was derived from the company's earnings and assets as well as the balance sheet.
Graham knew that the intrinsic value was imprecise and that some amount of uncertainty existed in using it. Despite that, he felt it was a superior way of valuing securities.
As long as you knew the intrinsic value of a company, you could easily calculate the margin of safety.
No comments:
Post a Comment