To know how to value a business is paramount for investment success. However, the first and even more significant step is to know where to look for opportunities. Unfortunately, investors usually pay attention to fairly priced securities that have no special interest when they process information and study the financial statements of companies and the reports prepared by Wall Street analysts. Indeed ideas will not come from scanning recommendations of these analysts, despite their reputation. Good investments must be looked for assiduously. They do not come out of nothing. They tend to be rare and valuable.
Sometimes attractive opportunities appear but the only limiting factor is the available funds to invest. In general, the number of these opportunities are limited. The idea is to try to identify which are the most attractive before starting the quest for the exciting handful of specific investments. Actually, investors can spare themselves an often fruitless survey of the humdrum majority of available investments.
Value investing is a tough task that involves specialized niches that are represented by three categories: securities selling at a discount to breakup or liquidation value, rate-of-return situations, and asset-conversion opportunities. Where to look for opportunities varies from one of these categories to the next.
For instance, computer-screening techniques are useful to identify stocks selling at a discount. However, investors should be cautious. They must make sure that the computer output is correct because it can sometimes be out of date.
Risk arbitrage and complex securities comprise a second category of attractive value investments with known exit prices and approximate time frames, which, jointly, enable investors to calculate expected rates of return at the time the investments are made. The information about the former can be generally found in the Wall Street Journal and the business section of the New York Times, as well as in specialized newsletters and periodicals, while in terms of complex securities it is more difficult.
Financially distressed and bankrupt securities, corporate recapitalizations, and exchange offers all fall into the category of asset conversions, in which investors' existing holdings are exchanged for one or more new securities. Regarding the first two, the information can be identified in the financial press. Corporate recapitalizations and exchange offers can usually be identified from a close reading of the daily financial press.
What about undervalued securities? They do not fall into any of these categories and information about them can be found through hard work, yet there are widely available means of improving the likelihood of finding mispriced securities.
Looking at stocks on the Wall Street Journal's leading percentage-decline and new-low lists, for example, occasionally turns up an out-of-favor investment idea.
Of course there is a common place: the Securities and Exchange Commission. All companies of a requisite size prepare annual and quarterly reports that they submit to the SEC. These reports are often available.
Sometimes an attractive investment niche arises where numerous opportunities develop. One area is, for instance, the large number of thrift institutions that have converted from mutual to stock ownership. Investors should analyze all companies within this category to identify if there is any undervalued firm. Specialized newsletters and industry periodicals can be excellent and extremely useful sources of information on such opportunities.