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Principles that have stood the test of time

March 21, 2006

by Charles Mizrahi

Over the past several years I must have read more than 50 books on value investing. I have also researched great investors for their secrets to investing. After all my reading and research, it comes down to a few basic principles that haven't changed much over the past 70 years. And no, you really don't have to be that smart either. As Warren Buffett said: "Successful investing requires a quality of temperament, not a high IQ. You need an IQ of 125, tops - anything more than that is wasted".

I. Think of a stock as part of a business

As simple as this sounds, this is the last thing that many investors do. Look at a stock the same way you would look to invest in a private company. Ask yourself:

1. What is the long - term outlook of the business?

2. How good are the people running the business?

3. Is the business attractively priced?

II. How to view the stock market

Ben Graham provided a framework for dealing with the stock market that will keep you sane while others are going crazy. Mr. Market is your partner who appears every day and offers to buy or sell your holdings. Some days he is totally depressed and will offer you very low prices. Other days he becomes euphoric and will bid up prices to the sky. He also doesn't mind if you ignore him. Mr. Market is a terrible arbiter of value, so don't allow him to tell you what a company is worth. Take advantage of him when it is to your advantage and ignore him the rest of the time.

III. Margin of safety

Warren Buffett said that these three words, margin of safety, are the most important words on investing. Don't buy $1 worth of assets for 95 cents; wait until the discrepancy between price and value is very wide. Then, and only then, should you make a purchase. The wider the discrepancy between the stock price and the underlying value, the great the margin of safety.  

IV. Financials

When you look at the financials of a company, you really can't get into too much trouble if you buy companies that have little to no debt and consistently produce returns on equity greater than 15%.

That's all there is to it. If you stick with a philosophy that looks at stocks as pieces of a company, ignore the daily ups and downs of the stock market, give yourself a wide margin of safety and buy companies that have very little debt and high ROEs, you can't miss.

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Charles Mizrahi is editor and publisher of Hidden Values Alert newsletter, which focuses on finding stocks trading significantly lower than their underlying business value. He has over 23 years experience in the financial world as a money manager and investor. Email: charlesmizrahi@gmail.com, Webpage: www.HiddenValuesAlert.com


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