Why is it that some people hunt far and wide for bargains on coats, shoes, or diapers, but avoid entire companies when they're on sale? Value investors view the stock market no differently than they do the supermarket. They know what they're looking for in an investment, have a good idea what companies are worth, and are always looking to be able to buy what they want when it's on sale.
One of the attractions to value investing is the potential to beat the market. Value-priced companies are companies the market has put on sale -- they have what Benjamin Graham called a margin of safety. As discussed in my commentary "Three Magical Words", that margin of safety helps protect investors from a certain amount of bad news while also giving the companies that much further to rise.
That lesson has been driven home to me, thanks in large part to Philip Durell and the Motley Fool Inside Value newsletter. One of Philip's first picks was telecommunications giant MCI
A valuable community
Philip isn't the only one taking advantage of bargain-priced companies. Within the newsletter, there was a contest to determine the best value-priced stock, with the winner receiving a free one-year subscription. The winning entry was auto parts superstore AutoZone
One of the finalists in the competition was clothing retailer Limited Brands
While those companies were value priced, their recent market-beating price climbs have eroded some of the margin of safety, and thus the superior value that investors saw in those firms. Fortunately for value-seeking investors, there are always opportunities somewhere in the market.
In that same contest, my entry was home builder Lennar's Class B shares
Meanwhile, another of Philip's early picks was LandAmerica competitor and fellow title insurance company First American
While there are no guarantees in investing, Philip's track record at Inside Value over its short history has been tremendous. The race is just beginning, however, and no marathon is ever won in the first minute. Philip is in it for the long haul, and he is committed to continuing to find bargain-priced companies that he believes can outperform the market over time.
Remarkably enough, in spite of thus far delivering market-beating returns to subscribers, Philip's investing style is straightforward. First, he carefully calculates a conservative estimate of a company's intrinsic value -- the price at which he would consider a company fairly priced. From that value, he subtracts a margin of safety -- the discount that lets him know he is truly finding a bargain. That price becomes his buy-below price. Once he knows that information, he compares it with the price the stock market is quoting for the company. If the market priced the company lower than his buy-below price, it becomes a company worthy of consideration. It's a simple brand of bargain hunting that works in both the supermarket and the stock market.