A Page From Buffett's Value Playbook

This factor is one piece of the puzzle… Published By Money & Markets, LLC. September 03, 2024 Published By Money & Markets, LLC. September 03, 2024 [Turn Your Images On] Editor's Note: With Warren Buffett's recent birthday, we wanted to highlight what the Oracle of Omaha is really looking for as a value investor. [Turn Your Images On] From The Desk of [Adam O'Dell]( Editor, [Money & Markets Daily]( A Page From Buffett's Playbook: The Best Value Stocks Aren’t Just “Cheap” Money & Markets Daily, Warren Buffett, the Oracle of Omaha, is the most recognizable, revered and oft-quoted stock market investor of all time. We know him as a “value investor.” Because of Buffett, “value investing” is one of the most recognized investment strategies. I've written about my proprietary Green Zone Power Ratings system’s “size” factor (one of the six metrics my system uses to rate stocks between 1 and 100.) Few think of themselves as “size-factor investors.” But identifying as a “value investor” somehow carries with it a certain cache — a badge of honor that’s difficult to criticize. Buffett played the value game well before we had a name for it. (No one used the term “value investing” before 1992.) Most of Buffett’s admirers have concluded that he has a God-given talent for identifying great companies that sell for less than they’re worth. The Oracle has never relied on “quant” models, computers or algorithms. It’s easy to assume his extraordinary success comes from a combination of hard work and sheer talent. But what if I told you that the value factor — which we can reduce to an algorithm requiring no human interaction — can almost fully explain Buffett’s investment performance … and wipe out the story of his special Midas touch? With a more optimistic spin… What if I told you that you could perform just as well as Buffett if you simply use the Value factor when selecting stocks? --------------------------------------------------------------- [Turn Your Images On]( [Is Apple Plotting to Kill Its iPhone?]( Rumors are swirling about Apple's secret AI lab. Now, insiders hint that an AI-powered device could render today’s iPhone obsolete. Codenamed MM1, [this project]( has the potential to disrupt the smartphone industry. With Apple scooping up $1.6 TRILLION in iPhone sales since its launch… Will YOU be in position for what Apple’s “next big thing”? [Click here now to see all the details.]( --------------------------------------------------------------- How the Value Factor Works Hundreds of academic studies have shown that you can earn market-beating returns if you simply buy stocks that are priced “cheaply” and avoid buying “expensive” stocks. A word of caution: Novice investors often view stocks as expensive based on their share price alone — so they buy five shares of a stock that trades for $20 per share rather than one share of a $100 stock because it’s “cheaper.” However, when our Green Zone Power Ratings system identifies “cheap” stocks, that refers to more than the share price. We can determine what stocks are “cheap” and “expensive” using simple ratios, including the price-to-earnings (P/E) ratio. P/E is the most popular, and we include it — along with several others — in the value factor of our Green Zone Power Ratings system here on Money & Markets. Let’s look at a simple example. Stock ABC sells for $20 per share (i.e., the market price is $20). ABC produced earnings of $4 per share over the prior 12 months. ABC’s stock has a price-to-earnings ratio of 5. ($20 price divided by $4 earnings equals 5.) Any time you see these ratios presented with the price portion first, as in “price-to-earnings,” it’s more desirable to buy a stock with a lower ratio, which indicates it’s “cheaper” or a “better value,” than a stock with a higher ratio. For most investors I know, the “value investing” approach is intuitive — it just makes sense! How Value Investing Is Like Home Shopping Imagine you’re in the market for a new home. You find two 3,000-square-foot houses built by the same builder on the same block: [Turn Your Images On] In the example above, you’d want to buy House 1, right? You’d say, “House 1 is a better value.” You know that because when you divide the price, you pay by “what you get” for that price. In the example above, the better value seems clear. But it’s equally important to know what you’re getting for the price you pay. I suggested you’re getting the exact same 3,000-square-foot house. But it’s rarely that simple. Maybe one house is made of wood and the other concrete block. Perhaps one was built in the 1900s, while the other was built in the last 20 years. Or what if one has a pool and the other doesn’t? Stocks are similar. When you decide whether to buy Stock A or Stock B, it’s not always easy to see what you’ll get from each company. The Best Value Stocks Aren’t Just “Cheap” That’s why the “Quality” and “Growth” factors we use in my Green Zone Power Ratings system are also important. It’s easy to reduce Buffett’s M.O. to “value” or “buying companies for less than they’re worth.” But that’s not the whole story. In Buffett’s own words: “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.” It’s important to consider other major tenets of his approach, which include: • Solid fundamentals. • Strong earnings power. • Potential for continued growth. All things equal, the Value factor tells us it’s better to buy a “cheap” stock than an “expensive” one. But in the stock market, all things are rarely “equal.” When buying a stock that’s attractively valued, you also have to be certain the underlying company is of high quality and has strong growth prospects. That’s the real key to value investing. To good profits, [Adam O'Dell]( Editor, [Money & Markets Daily]( --------------------------------------------------------------- Check Out More From Money & Markets Daily: - [THESE 2 FACTORS HAVE TKO STOCK IN A HEADLOCK]( - [INNOVATION WITH A SIDE OF BACON]( - [THE PARADOX THREATENING AI'S FUTURE]( --------------------------------------------------------------- [Turn Your Images On]( Privacy Policy The Money & Markets, 702 Cathedral Street, Baltimore, MD 21201. To ensure that you receive future issues of Money & Markets, please add info@mb.moneyandmarkets.com to your address book or [whitelist]( within your spam settings. For customer service questions or issues, please contact us for assistance. 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Although our employees may answer general customer service questions, they are not licensed to address your particular investment situation. Our track record is based on hypothetical results and may not reflect the same results as actual trades. Likewise, past performance is no guarantee of future returns. Certain investments carry large potential rewards but also large potential risk. Don't trade in these markets with money you can't afford to lose. Money & Markets permits editors of a publication to recommend a security to subscribers that they own themselves. However, in no circumstance may an editor sell a security before our subscribers have a fair opportunity to exit. Any exit after a buy recommendation is made and prior to issuing a sell notification is forbidden. The length of time an editor must wait after subscribers have been advised to exit a play depends on the type of publication. (c) 2024 Money & Markets, LLC. All Rights Reserved. Protected by copyright laws of the United States and treaties. This Newsletter may only be used pursuant to the subscription agreement. Any reproduction, copying, or redistribution, (electronic or otherwise) in whole or in part, is strictly prohibited without the express written permission of Money & Markets. 702 Cathedral Street, Baltimore, MD 21201. (TEL: 800-684-8471) Remove your email from this list: [Click here to Unsubscribe](