On Value and a Great Business
Value investing consists of a simple premise: the purchase of an asset at a price that is significantly discounted from its value. At some point in the future, the value and price discrepancy will shrink (hopefully with the price rising and the value not) and the investor can sell the asset at a price much higher than his original purchase price.
The traditional, Benjamin Graham-style of value investing has focused on the purchase of these assets with only two dimensions to evaluate: price and value. The price, in the case of publicly traded corporation, is readily available. For private businesses, the price may not be as easy to obtain. The value is something that the investor has to determine using many different methods (which we will save for another day)
But another dimension that the mainstream press overlooks (and Buffett learned with See’s Candies) is that time impacts the value of a business as well. In the case of a mediocre business, the value the business will provide over time will likely not eclipse a benchmark rate - e.g. an index fund. Meanwhile the value of a great business will grow with time at a rate that exceeds the benchmark rate (which is the definition of a great business)
Most investors miss a fundamental concept - that the investor cannot invest in every business deal. Each dollar invested can only be invested in a single deal at a time (if you’re reading this I assume you wouldn’t buy on margin). Although the concept sounds obvious, in practice opportunity cost is much more difficult to understand, especially in the heat of the moment. Every investor knows the excitement that surrounds finding a good deal. But not every investment found is the best investment.
So that leaves us with the most important aspect of investing that very few are able to do. And is also why this newsletter exists. In short, the investor must evaluate every available deal and rank them based on the expected rate of return. With that in place, the investor must divide his available capital amongst a select few deals. Not every investor will have the same list of deals, but we aim to evaluate every deal in the public markets. The reader of this newsletter then must make his own decision as to what he wants to do based on his own circle of competence (also a topic for another day)
We look forward to provide that list to you on a regular basis and hope to provide a safety of principle and a significant return to our readers.