Value Investing

This post is meant to give its readers a basic understanding of value investing. Some of the information was inspired by a book (The Great Investors, by Glen Arnold). Clicking on the picture below will download a spreadsheet that the reader can use to help make investment decisions based on value investing. I hope the reader finds the following post interesting.

Value Investing: The Background

In a previous post I wrote about the great investor, Benjamin Graham. In his books, 'Security Analysis' and 'The Intelligent Investor' (two books that are highly recommended reading), Graham outlined his theory about Value Investing .
The beauty of Value Investing is that you don't need to be a maths genius to use it to analyse stocks and shares. All you need to be able to do is to use simple basic addition and subtraction and to be able to interpret the numbers from a company balance sheet.
To gain the most from this post, I urge you to click on the picture opposite or download my free spreadsheet and follow along when necessary.

What is Value Investing?

A simple explanation of Value Investing in 8 easy steps:

  1. Download the annual report of the company of interest. This can usually be found on the companies website.
  2. Look at the relevant Quantitative Elements: Take all the current assets of the company and scale down each asset accordingly (see next section on using the spreadsheet)
  3. Deduct all liabilities (no scaling required) giving you a Net Current Asset Valuation
  4. Divide this number by the number of shares the company has issued giving you a Net Current Asset Value per share
  5. If this Net Current Asset Value per share is lower than the current company share price then the Quantitative elements of the company suggest that the share is undervalued
  6. Check the Qualitative elements of a business: It's management, stability, and prospects. Read the CEO's letter and ask people who work for the company about these elements
  7. Don't forget Additional Elements: Time, Patience and Diversification
  8. If the share in question passes all the previous stages then take some of your savings and buy the share!!!
Congratulations you are now a fully qualified Value Investor.

How does the Value Investing table works?

A simple explanation of my Value investing table in 3 easy steps:

  1. Download the spreadsheet
  2. Plug in the data found from a companies balance sheet on each relevant section. The relevant sections are as follows (the percentage that the spreadsheet actually uses of each section is in brackets-this scales the various assets): Cash (100%), Receivables (80%), Inventories (66.6%), and Fixed and miscellaneous assets (15%). Include 100% of all liabilities, number of company shares and current share price
  3. The spreadsheet will automatically tell you if the share is undervalued in the Quantitative sense, you will need to perform stages 6 to 8 yourself
I have included a basic example of valuing Barclays PLC at the time that I first created Barclays. Please do not take it as a share tip as the numbers have changed now.

With the help of my spreadsheet you should now all be able to Value Invest. Good luck. Let me know how it goes. What companies did you find undervalued? Is Value Investing the best way to make an intelligent investment decision? Have you thought of other ways that you could assess the non-Quantitative elements of a company?

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Liquid Independence said...

Thanks for sharing your formula and spreadsheet (^_^) The Intelligent Investor is a great book. It's surprising how Graham's strategy still works well today, even after all these years.

Mr. Moneybanks said...

Thanks Liquid Independence. Exactly, companies come and go but the statistics behind what makes a great company remain the same over time.