Is it just me?
"The trend is your friend." I'm sure you've heard that many times. It's an aphorism that advises us to buy when prices are rising.
I don't know about you, but it doesn't seem intuitively right to me. If prices are rising, haven't I already missed my chance to score a bargain?
Keep it simple, stupid
That's why I -- along with my colleagues at Motley Fool Inside Value -- try to keep things simple. As such, we have one criterion for the best time to invest:
The best time to invest is when the price we pay is low relative to the value we receive.
Why? Well, it's not just because Warren Buffett says so. Rather, it's because over the long haul, this strategy is known to create wealth and simultaneously preserve capital. For proof, just look at the envy-producing track records of Bill Miller, Bill Nygren, and Wally Weitz.
We're all about value
Prices are constantly being quoted in the stock market. Calculating value, however, is up to you. At Inside Value, we use a number of different tools: discounted cash flows, economic value added, and liquidation, to name a few. Then we compare our estimate of value with the current price. If the price is too high, we let the stock pass and wait for a better price. If our margin of safety is high enough, then we consider recommending the company.
Yes, the concept truly is that simple. But how does value become higher than price? I'm glad you asked.
The buying opportunities
Here are three ways in which value can be higher than price and buying opportunities thus present themselves.
1. Value increases while price stays flat.
Many value investors take advantage of this opportunity. In fact, Miller, Nygren, and Weitz have all commented that large-cap stocks have lagged the market for this very reason. For example, General Electric
2. Price falls when value stays flat or even increases.
This is where real money can be made in the stock market. Unfortunately, the opportunities are rare so we have to be ready when we find them. In the late '90s and into 2000, Berkshire Hathaway's
3. Price rises while value rises faster.
While this method can be tough for most traditional value investors to use, myself included, Bill Miller is not what I would consider a traditional value investor. It's hard to argue with his track record, and I think his successful investments in Google
The Foolish bottom line
No matter what the stock, you need to demand lots of value for the price you pay. That's the pledge we make to subscribers at Inside Value.
Take the case of Dell
If you want to get the most bang for your investment buck, as well as find out why Philip thinks Dell is a great bargain today, come and join the Inside Value community by signing up for a free 30-day trial. Not only will you see how he's beating the market today, but you'll also always see the stocks that are poised to beat the market tomorrow.
Fool contributor David Meier is a member of the Inside Value team and demands a high margin of safety from all of his investments. He does not own shares of any of the companies mentioned. You can see his profile here . Dell is an Inside Value recommendation. Dell and eBay are Stock Advisor recommendations. The Fool has an ironclad disclosure policy.