Rates of return on stocks are a function of three things: beginning dividend yields, growth of earnings, and changes in valuation.
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One of the most powerful sources of mispricing is the tendency to over-weight or over-emphasize current conditions.
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Growth is an input into the calculation of value. Companies that grow are usually more valuable than companies that don’t.
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Most companies that sport lofty valuations fail to generate results that justify them.
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As I often remind our analysts, 100% of the information you have about a company represents the past, and 100% of the value depends on the future.
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When growth becomes scarcer and the discount rate becomes lower, growth becomes more valuable.
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Regardless of yield, when investments are absent of value, cash is always a better option than permanently losing money.
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We believe that if a market is so overvalued that you can only find a few stocks to buy, you are probably better off not buying anything.
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While the Stock Exchange list exhibits the widest diversity, in both directions, between market prices and book values, the underlying explanation is simple enough. In general, prosperous enterprises sell for more than their assets, and unsuccessful ones sell for less.
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It is not the low multiple by itself that provides unusual opportunity nor the high evaluations that carry excessive risk. It is, rather, that the level of investment anticipations is low on one side and high on the other.
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You can’t be a good value investor without being an independent thinker – you’re seeing valuations that the market is not appreciating. But it’s critical that you understand why the market isn’t seeing the value you do.
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What publicly-traded companies are worth is roughly 90% dominated by the cash flows they produce over time and 10% by what the market will pay for these types of companies at any given time.
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The worth of a business is measured not by what has been put into it, but by what can be taken out of it.
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Current earnings, future prospects, management, marketability are all factors more or less independent of assets which contribute their share to the intrinsic value.
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We don’t get involved in all the analytical baggage of trying to figure out where a stock is going to sell. Just try to figure out what it’s worth. And I dare say all the really great investors do it the same way.
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I always look for red flags. My major red flag all the time is when long governments yield 600 basis points over the yield on the S&P 500. At that point, stocks have always been overpriced.
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All successful investment involves trying to get into something where it’s worth more than you’re paying.
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In any diversified portfolio, there will be both winners and losers, and the consideration that should determine which you should sell, if any, is certainly not the price at which you bought it originally.
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Even the world’s greatest business is not a good investment if the price is too high.
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If you have an opinion about the level of prices, it should be an opinion based upon your concept of the values of securities in relation to price, rather than on any prophecy or expectation of changes or of the continuance of a given moment.
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Buying stocks of prosperous concerns may be good business — but only at a certain price. But if you will make sure you know what you are getting for your money, you will be doing what nobody does in a bull market.
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The P/E ratio is only a reflection of what most investors expect to happen at a point in time, and that is neither here nor there in terms of what actually will happen.
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There is nothing at all conservative, in my opinion, about speculating as to just how high a multiplier a greedy and capricious public will put on earnings.
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Our business is making excellent purchases — not making extraordinary sales.
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I have always found it easier to evaluate weights dictated by fundamentals than votes dictated by psychology.
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Market prices for stocks fluctuate at great amplitudes around intrinsic value but, over the long term, intrinsic value is virtually always reflected at some point in market price.
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It’s my job to find unusual companies and then judge whether the price they’re selling at is too high.
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Even a great company can be priced too high if there’s a lot of glamour attached to it.
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My business is to find unusual companies and judge whether the price is too high.
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The inescapable fact is that the value of an asset, whatever its character, cannot over the long term grow faster than its earnings do.
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At all times, in all markets, in all parts of the world, the tiniest change in rates changes the value of every financial asset.
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When you find a really good business run by first-class people, chances are a price that looks high isn’t high. The combination is rare enough, it’s worth a pretty good price.
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History shows us, over and over, that bull markets can go well beyond rational valuation levels as long as the outlook for future earnings is positive.
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Your wealth is in many ways dependent on what other people will pay for your assets.
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A cheap stock can stay cheap forever, but if you own a bankrupt bond, the process of emerging from bankruptcy and distributing new securities offers a practical catalyst to realize the value.
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When the markets are fairly ebullient, investors tend to hold the least objectionable securities rather than the truly significant bargains.
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Investors must never mistake an investment that is down in price for one that is bargain-priced; undervaluation is determined only by a security’s price compared to its underlying value.
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We consider for each of our investments not only whether a security is undervalued but why it is undervalued. If the reason is that there are uninformed or emotional sellers, we become more comfortable.
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The main underlying principle of value investing is that you should invest in undervalued securities because they alone offer a margin of safety.
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Value to some extent is in the eye of the beholder. It is very hard to pin down what the value of a future set of cash flows from a business, be it cable TV or biotechnology, is going to be.
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Mutual fund managers, desperate to put cash to work don’t buy what is cheap but what is working since what is cheap by definition hasn’t been working.
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Stocks often sell at ridiculously low levels for considerable periods merely because few people know anything about them.
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People say the market is overvalued, but if you are only looking at certain names, you will always find times when those names are undervalued. That’s what we’re waiting for.
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In point of fact, all sorts of considerations enter into the market valuation which are in no way relevant to the prospective yield.
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If you can invest your money under fair conditions, in fact under attractive specific conditions, I think one certainly should do so even if the market should go down further and even if the securities you buy may also go down after you buy them.
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The successful purchase of growth stocks requires two rather obvious conditions: First, that their prospect of growth be realized; and, second, that the market has not already pretty well discounted these growth prospects.
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Speculative operations are all concerned with changes in price. In some cases the emphasis is on price changes alone, and in other cases the emphasis is on changes in value which are expected to give rise to changes in price.
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Those with enterprise haven’t the money, and those with money haven’t the enterprise, to buy stocks when they are cheap.
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The true measure of common stocks values, of course, is not found by reference to price movements alone, but by price in relation to earnings, dividends, future prospects and, to a small extent, asset values.
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To my mind, the so-called growth-stock investor — or the average security analyst for that matter — has no idea of how much to pay for a growth stock, how many stocks to buy to obtain the desired return, or how their prices will behave.
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The only thing you can be sure of is that there are times when large numbers of stocks are priced too high and other times when they’re priced too low.
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The value approach has been founded on the premise that in many — but by no means in all — cases a dependable range of valuation can be established for a common stock by analytical techniques; that often this range differs substantially from the current price; and that such differences offer rewarding opportunities for investment operations.
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I insist that more damage has been done to stock values and to the future of equities from inside Wall Street than from outside Wall Street.
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All my experience goes to show that most investment advisers take their opinions and measures of stock values from stock prices. In the stock market, value standards do not determine prices; prices determine value standards.
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The true measure of common stock values, of course, is not found by reference to price movements alone, but by price in relation to earnings, dividends, future prospects and, to a small extent, asset values.
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Experience shows that when really cheap issues are scarce the general market is high; but we do not present this as an infallible principle.
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It is a great mistake to refine the analysis of a single year’s showing to the last possible penny, in order to build from that some substantial idea of the value of the stock; because it cannot be found in the results for any given year no matter how accurately those results were stated.
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The security analyst can only give you certain hints as to what the solution is likely to be, certain indications of a range of value rather than a specific figure, and perhaps a diffident suggestion as to where within this range he believes the probabilities of the future will lie.
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