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WHAT IS VALUE INVESTING?

October 09, 2006

Value investors seek to buy stocks trading at prices well below the estimated value of the underlying businesses. We believe that, in the long term, the prices of these stocks will rise as the market recognizes their true worth. By holding these stocks for three to five years, we believe they will help us deliver favorable long-term results with a margin of safety.

We look for a business with a potential margin of safety – one selling at a price below our estimate of its intrinsic value.

HOW DO YOU DETERMINE WHETHER A STOCK IS A GOOD VALUE?

We carefully evaluate the price we pay for the business. We analyze long-term rates of return, cash flows, balance sheet strength, management, asset values, and liquidation values. We also often look at private market transactions to determine intrinsic, or fair, value. We look for a business with a potential margin of safety – one selling at a price below our estimate of its intrinsic value. A margin of safety provides some protection from error and uncertainties. This is a conservative approach that aids in preserving capital and gives us the opportunity for profit.

HOW IMPORTANT ARE BOOK VALUES IN YOUR METHODOLOGY?

Book values can be very misleading as a measure of value. They are the result of generally accepted accounting principles that can be inconsistent with the true value of a business, depending upon the industry and nature of the business. As a result, our team of research professionals may make adjustments to book values to more accurately assess different companies. For example, an obsolete steel plant may be worth far less than the stated value on the balance sheet. Conversely, a well known, dominant brand name may have accumulated tremendous value that is not reflected on the balance sheet. We tend to purchase a stock if it is trading at a significant discount from its intrinsic value, as calculated by our fundamental research and analysis. Ultimately, we are business buyers. We approach investing as would any rational, private businessperson who was about to purchase a company.

DO YOU OWN STOCKS WITH LOW P/Es?

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