| Value Rank | Indicator | Risk/Return |
|---|---|---|
0
|  | highest potential risk |
1 |
 |
|
2 |
 |
|
3 |
 |
|
4 |
 |
|
5 |
 |
Average risk/return |
6 |
 |
|
7 |
 |
|
8 |
 |
|
9 |
 |
|
10 |
 |
highest potential return |
GuruFocus ValueRank is the ranking system that GuruFocus measures the potential returns and risks associated with investing in a stock. The ValueRanks of stocks are between 0 and 10. A stock with a ValueRank of 0 has the highest risk and the lowest potential return; a stock with a ValueRank of 10 has the lowest risk and the highest potential return.
The ValueRank of each stock is determined based on the guru factor and the price factor:
1. Guru factor: the number of gurus that bought/sold the stock
Since most of gurus in the Hall of Fame are value investors, the time frame that they hold a stock is at least 3-5 years, we believe that they have done diligent research before they buy or sell a stock. If they buy a stock, it means that after their research they believe that the stock is below the intrinsic value of stock by at least their margin of safety.
Every stock starts with a ValueRank of 5, which is neutral on the potential risks and returns. If a stock is bought/sold by gurus, its ValueRank is changed by an amount that is determined by the net number of gurus.
Every guru has a slight different style of investing. A minor weighting factor is used in calculating the net number of buyers/sellers. If a stock is bought by a guru, later he added more shares, he is not counted as 2. He is counted as only one.
2. The price factor: the relation between price and value
If a guru buys a stock at a certain price, it means that he thinks that the price he paid is below his calculated intrinsic value by at least his margin of safety. If he sells a stock, it means that the price has reached his valuation, or his initial calculation has overvalued the stock.
We also assume that if the gurus bought a stock, he expects that the intrinsic value of the stock grows by 12% a year. If a stock is bought by gurus at the discounted valuation, after a year the stock price increases by 12%, the stock is still at the discounted valuation. If the stock price stays flat or drop after a year, the stock is then at a deeper discount.
We assume that the average margin of safety gurus use is 40%.
In calculating the discounted valuation of a stock at a particular time, we consider the buys and sells of the gurus. If a stock is bought by several gurus, the discounted valuation is calculated with the time weighted average. If a stock is sold by several gurus, the discounted valuation is calculated with the time weighted average minus the margin of safety. If a stock is bought by some gurus, and sold by some others, the discount valuation is calculated as the average of the time-weighted buying discounted valuation and the selling discount valuation minus the margin of safety.
