Better Off Dead... Intrinsic Investing Part I

In 1932, value investor Benjamin Graham wrote an article in Forbes "Is American Business Worth More Dead Than Alive?" in this article, Graham questioned management from companies for sitting on troves of cash and investments, while investors over-looked this value. Graham developed a valuation system based on his skill for analyzing numbers. Security analysis became more of an art than a science due to the fact that companies(even back then) required a great deal of probing and detective work. A crime scene where hidden assets and liabilities are found and evaluated. IF the intrinsic value of a stock was the solution for X, then time was a Y variable. When will the stock reflect the hidden value? From these lessons, Warren Buffet developed three principles to follow when it came to investing:

1. Stock is the right to own a piece of a business. A share is worth a fraction of the entire business.

2. Use a margin of safety. Investing is built on estimates and uncertainty. A wide margin of safety ensures that the effects of good decisions are not wiped out by errors. If an investment is worth making, then the investor must advance positions, not retreat from them.

3. The Market is Your Servant, not your Master. Mr. Market's moods should not influence your view of price, but may occasionally allow the opportunity to buy low and sell high.

While no one really knows the value investing formula that Buffet uses, no one can argue his long-term success. Intrinsic valuations are just knowing the basics of number crunching, but in essence it takes due diligence to another level. We are reminded that intrinsic value can suggest stocks that are short as well as long candidates. While there are a variety of intrinsic value calculators on-line, the individual investor is best served with a system that is measurable, and consistent. In this market, Benjamin Graham would have us look for stocks that are over-valued (as in the case of many financial companies whose toxic assets are still undisclosed) to the banks that have been unjustly lumped with the losers.