Algoma Central & Stella-Jones Demonstrate Two Different Approaches To Value Investingby George Athanassakos, The Globe And Mail
Not all value investors are the same. Those who follow the Ben Graham (or early Warren Buffett) approach tend to be opportunistic – they buy and sell all the time. Those who follow the (contemporary) Buffett approach tend to be long-term investors – they buy and hold.
Irrespective, however, of which bucket they fall into, they all follow, in general terms, the same three-pronged process. First, they screen stocks by a number of metrics to identify those that are possibly undervalued. Second, the stocks selected in the first step are valued in depth to determine their intrinsic value (that is, how much the stock is truly worth). And third, they make a decision to buy only if the stocks are truly undervalued, namely, they satisfy a predetermined margin of safety.
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One misconception of value investing is that value investors buy only stocks with a low price-to-earnings ratio. This is not accurate in a couple of ways. First, they only buy low P/E stocks (normally less than 13 times) if they are truly undervalued – they do not buy all low P/E stocks. Second, they may consider higher P/E stocks as long as these stocks have a clearly identifiable competitive advantage and sustainability. The former are the opportunistic value investors, while the latter are the true long-term value investors.
Let me explain the value investing process by way of two examples, one of which may be attractive to an opportunistic investor and the other to a long-term investor, as analyzed by my MBA students in the value investing course I teach at the Richard Ivey School of Business.
Read the full article here.