Value Investing
The best stock investing strategy!

The value investing strategy attempts to determine the intrinsic value of a company and is based on a fundamental analysis of the company’s performance. The intrinsic value of a company commonly differs from the share price.

Unlike technical analysis, another common form of analysis commonly used by traders who use price charts to identify patterns that can suggest future activity, fundamental analysis does not take the current price of a company into account when undertaking the analysis.

The share price is what you pay for the company’s shares on the stock exchange, whereas the value of the company is what it is calculated to be worth. This distinction is often lost.

Warren Buffet, the celebrated successful value investor defined this approach as purchasing a stock for less than its calculated value. This comment describes in a nutshell the basics of value investing.

The difference between the value of a stock and the price at which it trades was defined by Benjamin Graham, the author of the acclaimed book The Intelligent Investor as the margin of safety - the bigger the margin the better.

I always try to assess the value of the company first and then decide whether it is currently available at a fair (cheap) price.

Determining the intrinsic value, or stock fair value of a company, can involve some number crunching based on present and future forecasts of the company. It usually involves discounting future cash-flow forecasts.

The approach I use is to look for value and then keep those companies that offer value in a watch list until the price drops to a level that provides a strong probability of achieving at least a 15% per annum internal rate of return (IRR).

That is, a return comprised of a combination of capital gain (increase in share price) and dividends (half yearly and annual payments to shareholders).

I also look, where possible, for icing on the cake in the form of franking credits. Companies that are listed as having their dividends 100% franked provides me with a tax break, as they have already paid the 30% company tax rate on the dividend.

Hence my tax bill on the dividends may be reduced, or my tax refund enhanced, depending on my current assessable income.

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