What’s Margin of Value?
Margin of Value is my outlet. It’s a place for me to clarify and better understand investing concepts. Through writing, I gain a better understanding of concepts that range from moats to irrational exuberance.
Writing about key ideas from books, papers and journals I read also helps me retain the information, instead of forgetting as soon as stop reading.
Why Did I Start This?
It should be pretty obvious that this project came about through selfish reasons. I wanted a place to share my thoughts on investing and business with like minded people.
Not only would my posts force me to come up with concrete answers of what I think investing is, I would benefit from others sharing their ideas and thoughts with me.
But of course this isn’t all just for me. My one hope is that this is somehow valuable for you. Maybe my studies help you find out more about a business you’re following. Or maybe something I write prompts you to challenge a bias you may have while investing.
Margin of Value is not just my tool. I hope it will also be yours.
I’m not a mathematician. I don’t have any kind of super technical analysis skills. I just follow the time tested approach of value – buying businesses for less than their worth.
Sounds simple enough. But as Warren Buffett once said:
‘Investing is simply, but it’s not easy.’
The hard part is understanding what a business is worth – its intrinsic value. According to Ben Graham, intrinsic value is that which can be justified by the facts, e.g. assets, earnings, dividends, definite prospects. The most important fact is usually the earnings power of a business.
Why is finding intrinsic value hard?
Because businesses and their values are always changing. For example, imagine an auto manufacturer growing earnings at 30% annually. People are demanding cars like crazy and there are no rivals in sight.
Then one year another auto manufacture in a different country (where labour and parts are cheaper) enters the market. Is the first automaker still worth as much as it was when it had monopolistic characteristic?
And this is just one simply factor affecting value. So many other variables can happen year-to-year affecting the earnings power, assets and prospects of a business. That’s why estimating intrinsic value cannot always be a precise figure.
Valuation is as much an art as it is science. That’s why two analysts of equal intelligence can look at the same business and come up with two different values.
But like Graham says, you don’t have to know a man’s exact weight to know his fat. The same is true for businesses. You don’t have to know their exact value to know they’re undervalued.