Our methodology is based on the idea that a significant difference may exist between the value of a company and its trading price and that, with the passage of time, this difference tends to disappear. The idea is not to know exactly why such a difference exists but to profit from it. Since the price of a company is readily available, the difficulty lies rather in estimating its value.
The value of a company is primarily derived from the value of its assets and their ability to generate profits. A company’s profit history on its own cannot ensure future profitability. By considering several other factors we can achieve a reasonable degree of certainty about the future of the company. Among the factors that we look at are the economics of the business, the competitive position of the company and the integrity and competence of its management.
After estimating the value of a company, we buy shares only if their price is significantly lower than our estimate. The difference between the price paid and our estimated value is our “Margin of safety”. The margin of safety provides a double benefit to the portfolio: it reduces the risk of permanent capital loss while considerably increasing potential returns.