Search for Good Value in Your Investments

Physician's Money Digest, November 2005, Volume 12, Issue 15

A good deal means getting somethingvaluable for a fair price.Unfortunately, people forgetthis when investing their cash. They relyon tips and are often motivated by greedrather than a quest for good investmentdeals. Not getting good value in yourinvestments is much worse than formost other things. For example, if youoverpay for an antique, or even a house,you can still use what you bought. Butinvestments are bought for the sole purposeof making money. If you overpayfor these items, you will likely losemoney and hurt financial security.

Estimate and Compare

Value investing is a method focusedon finding investments with good,inherent value. Value exists when theprice of an investment is less than areasonable estimate of its true worth.How do you arrive at such an estimate?The best way is to rely on tangiblefinancial evidence, most importantlythe cash-generating ability of thebusiness and the value of the company'sassets. Value investors use thisinformation to arrive at an estimate ofa stock's worth and compare it to themarket price. Investors can also comparea stock's price with other, similarcompanies. If there is no discerniblereason why the stock is cheaper, agood investment may be at hand. Thesearch for good value investments maytake different forms, such as discoveringa small company with a new profitableproduct or a large company thatis turning itself around.

The reason why we look for valuewhen making an investment is to putthe balance of risk vs reward in ourfavor. We cannot eliminate risk, andeven the best value investor may getthe future wrong. But as long as thereis some underpinning of true value inan investment, downside risk is limited.For example, if you buy stock in astruggling company with cash and realestate worth $10 a share and pay $12a share, then $10 should be a solidfloor. If the business improves, thestock should rise more than $2. Therisk vs reward equation is in theinvestor's favor.

Analyze and Prosper

Value investing often requires thekind of detailed analysis that someinvestors may want to leave to a professional.But regardless of whocrunches the numbers, value investingis a state of mind that all investorsshould embrace. Value investors dependupon spotting a good investmentvalue and then letting that valuebecome apparent to other investors.True value almost always wins out inthe end, and so do investors whoadopt this way of looking at theinvestment world.

is the principal at Arrival

Capital Management LLC. He welcomes

questions or comments at jay@arrivalcapi This article was reprinted with permission

from the Southern Ulster Times.

Jay A. Rosenberg