There are far too many articles and shows about stocks. Almost all of them are nonsense because they fail to even mention the underlying values of the companies they recommend. Investing without considering value is merely gambling. As we await the next investment opportunity in this high priced momentum driven market, we want to offer some simple guidance for making sound decisions to build a successful portfolio.
Intrinsic value is the key concept that separates investment from speculation (i.e., gambling). A stock represents ownership of a share of a business and as such has an underlying value. Over time, the price of a company's stock will increase as the underlying value of the business increases. However, an increase in value of the company will not increase the value of the stock, over the long term, if the stock was already overpriced. Stock market pundits conveniently ignore this fact, often providing only superficial or meaningless analyses (even though they are usually heavily supported by fancy tables, charts and graphs). Perhaps that is because they just do not know how to assess underlying values, they choose to speculate, or they would not have enough to talk about otherwise, or all of the above. Well, they can speculate all they want with their own money. Do not let them risk yours.
Although there is more than one way to value a business, generally speaking, a company's intrinsic value is the present value of its future earnings, according to Warren Buffett. The determination of present value requires an estimate of future earnings and its accuracy hinges on the predictability of those earnings. Thus, both qualitative assessment of the long term demand for a company's products or services, including competitive position, and quantitative assessment of its financial characteristics is critical. However, this analysis need not be overly complicated. As in the past, our articles will address the underlying intrinsic values of the subject companies and explain how they were determined.
Proper temperament is more important for successful investing than intelligence, according to Warren Buffett. Although you must supply the proper temperament, focusing on intrinsic value makes it easier to avoid emotional and irrational decisions.
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