Some Thoughts on "Value Investing" Philosophy

First of all, I would like to thank everyone who supported our efforts to start WP Finance Association. The response has been beyond anyone’s imagination. Few weeks back, it was just an idea like many other great things in life, but with your dedicated work and support we have one of the largest student associations in UCD GSM history.

I know that in very near future, some of you will get to meet one the best investor of all time - Mr. Warren Buffett. I was fortunate enough to be part of Omaha trip last year and it was one of the best experiences of my life. Ever since, meeting Oracle of Omaha (and riding with him on front sit in his car), I have been studying his life work and his style of investing. Buffet’s investing style is heavily influenced by two legends of investing world

1. Benjamin Graham: Buffet’s mentor and one of biggest proponent of “Value Investing”
2. Philips Fisher: “One of the great investors of all time” according to Morningstar

I wanted to share some thoughts with you about Value investing and Warren Buffet’s approach.

Who is a value investor?

The value investor, perhaps more than any other type of investor, is more concerned with the business and its fundamentals than other influences on the stock’s price. Fundamentals, such as earnings growth, dividends, cash flow, and book value are more important than market factors on the stock’s price or chart patterns (Remember Professor Barber’s comments on this?). Value investors are also “buy and hold” investors who are with a company for the long term. If the fundamentals are sound, but the stock’s price is below its obvious value, the value investor knows this is a likely investment candidate. The market has incorrectly valued the stock. When the market corrects that mistake, the stock’s price should experience a nice rise.

Here are some of the criteria I use to find “Value Stock”


• A Price Earnings Ratio (P/E) in the bottom 10 percent of its sector.
• A PEG of less than one. A PEG of less than one may indicate the stock is undervalued.
• A Debt to Equity Ratio of less than one.
• Strong earnings growth over an extended period. A realistic number might be in the 6% - 8% range over 7 to 10 years.
• A Price to Book ratio of one or less.
• Don’t pay more that 60% to 70% of the stock’s intrinsic per share price
• Above average growth on ROE for last five year




As mentioned earlier, one of the biggest challenges in Value investing is to understand the business model itself. Phil Fisher came up with a series of questions that helps to evaluate a company for investment perspective. These questions should be asked to key suppliers, customers and competitors.


1. Does the company have products or services with sufficient market potential to make possible a sizable increase in sales for at least several years?
2. Does the management have a determination to continue to develop products or processes that will further increase total sales potentials when the growth potentials of currently attractive product lines have largely been exploited?
3. How effective are the company's research and development efforts in relation to its size?
4. Does the company have an above-average sales organization?
5. Does the company have a worthwhile profit margin?
6. What is the company doing to maintain or improve profit margins?
7. Does the company have outstanding labor and personnel relations?
8. Does the company have outstanding executive relations?
9. Does the company have depth to its management?
10. How good are the company's cost analysis and accounting controls?
11. Are there other aspects of the business, somewhat peculiar to the industry involved, which will give the investor important clues as to how outstanding the company may be in relation to its competition?
12. Does the company have a short-range or long-range outlook in regard to profits?
13. In the foreseeable future will the growth of the company require sufficient equity financing so that the larger number of shares then outstanding will largely cancel the existing stockholder's benefit from this anticipated growth?
14. Does the management talk freely to investors about its affairs when things are going well but "clam up" when troubles and disappointments occur?
15. Does the company have a management of unquestionable integrity?



I strongly believe the Buffett’s style of invest is amalgamation of these two legendry investors along with his own genius.

The following are some questions to determine what business to buy, based on the book Buffettology by Mary Buffett:

1. Is the company in an industry with good economics, i.e., not an industry competing on price. Does the company have a consumer monopoly or brand name that commands loyalty? Can any company with an abundance of resources compete successfully with the company?
2. Are the Owner Earnings on an upward trend with good and consistent margins?
3. Is the debt-to-equity ratio low or is the earnings-to-debt ratio high, i.e. can the company repay debt even in years when earnings are lower than average?
4. Does the company have high and consistent Returns on Invested Capital?
5. Does the company retain earnings for growth?
6. The business should not have high maintenance cost of operations, high capital expenditure or investment cash outflow. This is not the same as investing to expand capacity.
7. Does the company reinvest earnings in good business opportunities? Does management have a good track record of profiting from these investments?
8. Is the company free to adjust prices for inflation?
9. Buffett also concentrates when to buy. He does not want to invest in businesses with indiscernible value. He will wait for market corrections or downturns to buy solid businesses at reasonable prices, since stock market downturns present buying opportunities.

He is known for being conservative when speculation is rampant in the market and being aggressive when others are fearing for their capital. This contrarian strategy is what led Buffett's company through the Internet boom and bust without significant damage, although critics have also noted that it may have led Berkshire to miss out on potential opportunities during the same period.


One of the biggest questions in investing is – when to sell? Buffets’s preferred holding period is forever, but recently he has sold stocks in few companies for e.g. PetroChina. I personally believe that one should sell their investment for one of these reasons only.

• Fundamental shift in economics or strategy of the business
• Health or Education related expenses
• Liquidity concerns (assuming you exhausted all credit opportunities)
• Better investment opportunity

Also, it is very important to keep tax consequences in mind when one does that (learned that after taking Tax Class from Professor Yetman).

In summary I believe value style of investing demands emotional discipline, understanding of core business and above all patience.

Here is a quote I think reflects mentality some of so called “Investment Houses”

We believe that according the name 'investors' to institutions that trade actively is like calling someone who repeatedly engages in one-night stands a 'romantic.'

Warren Buffett