August 18th, 2009

I am a value investor and have been study the techniques applied by some of the best including Warren Buffett and his mentor Benjamin Graham and the many alike that have been able to outperform the market over time. I invest in companies that have earnings potential but for many reasons have been disregarded by the public.

This creates an opportunity for value because the price is below book value in these cases and it gives us an element of a margin of safety. During an analysis of the income statements, balance sheets, and cash-flow statements I arrive at a value for a company. If I was describing my examination of a balance sheet to a beginner it would be as simple as assets minus liabilities divided by the shares outstanding. However, what we have learned is that the intelligent investor must be wary of the traps of false accounting and must look at historical data to validate current statements.

Along with this there are the adjustments for different types of debt holders and any sort of dilution factor - the goal being to get the most accurate and realistic numbers. Investing in companies of this kind involves a lot of upfront risk, I say this because if you don't do your research you may very well pick a company that has gotten into this position for very serious reasons. So, I can not advocate that a beginner should try applying any of these techniques because while investing in a sound company with strong fundamentals that is undervalued involves very little risk, the opposite is also true.