Equity Selection

"Confronted with a like challenge to distill the secret of sound investment into three words, we venture the following motto: Margin of Safety."
Benjamin Graham
"Investing is most intelligent when it is most business-like."
Benjamin Graham

In these two sentences, Benjamin Graham has encapsulated the general principles for successful investing in the long run. Many preeminent investors have grown in his footsteps. And we will not claim credit for reinventing the wheel either. Our firm's investment process is based on the same sound investment principles enounced after the US depression, which can be summarized as "buying businesses below their intrinsic value."

The traditional definition of intrinsic value emphasizes the role of facts: the value which is justified by assets, earnings, dividends, definitive prospects, and management. Intrinsic value is a concept that requires a comprehensive analytical framework. It consists of quantitative and qualitative fundamental research applied at corporate, industry and market level, in order to get a reasonable estimate of the "central value" of the underlying business.

Margin of safety applied to equities means investing, if and only if the underlying business is worth more than the quoted price. Relying on defined standards of value reduces the risk of becoming a victim of the tides of pessimism and euphoria which sweep the security markets.

Earnings power and earnings predictability (a function of various business outcomes), as well as the discount factor, dictate the intrinsic value of the business. A wider range of outcomes and greater expected returns will require bigger discounts to the "central value".