Mgt 4067 Final Paper

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Ryan Yan
Final Project Status Report
2/28/2013
Executive Summary
While there are many different types of investment strategies, each one of them aims to score the highest returns. One investing strategy, however, has always withstood the test of time. In 1934, Benjamin Graham and David Dodd published Security Analysis, which uses fundamental analysis and laid the intellectual foundation of value investing. Perhaps the most prolific businessman, Warren Buffet, has also used this strategy of value investing to make billions. This paper outlines the philosophies used in value investing and provides a portfolio that attempts to reflect these principles. The composition as well as the performance of the portfolio will be discussed in later sections of the paper. Keep in mind, however, that it is extremely difficult to test the validity of the value investing strategy over such a short time horizon. In fact, one should feel very comfortable holding “value stocks” in his or her portfolio across multiple business cycles. Investment Philosophy

Firstly, it is important to distinguish investment philosophy and investment strategy. The underlying rationale behind picking stocks in this portfolio will be based on the value investing philosophy. Value investing almost completely discounts market fluctuations and focuses much more on finding stocks of substantial value – companies that are on the market for cheap. In principle, with time, the market will correct itself and the stocks that have been picked when they are low will return or even supersede what they are deemed to be worth today in the market. Now, in terms of strategy, one can choose stocks that are not considered traditional “value stocks,” such as stocks with higher P/Es ratios (beyond 10), and still derive plenty of value from the respective company depending on the timeframe of investment. This, however, truly depends on the industry in which the respective company lies. Using the value investing philosophy, one’s would never strategically pick, for example, an oil and gas company with a higher multiple over another comparable company with a lower multiple. Traditionally, low price to high earnings indicates the potential for unlocked growth. Value investing does not exclude nor preclude companies that have potential for future earnings growth. In fact, value and growth are “joined at the hip,” according to Buffet. Of course, one can rightfully pick stocks that are priced lower than the book value in hopes that, in time, the market price will at least reflect the stated book value of the company. It is, however, difficult to find stocks whose value of net current assets is greater than the trading price. This selection technique was widely employed by Buffet’s mentor, Benjamin Graham. Picking stocks that are not based on market or industry hype is a predictable means to get a great return on investment. In Graham and Dodd’s Security Analysis, they state that “the soundness of a common stock investment, in a single issue or a group of issues, may well depend on the ability of the investor or the analyst-advisor to justify the purchase by a process of formal valuation. In plainer language, a common-stock purchase may not be regarded as a proper constituent of a true investment program unless some rational calculation will show that it is worth at least as much as the price paid for it.” Perhaps, the most famous value investor, Warren Buffet stated it best when he stated ‘Price is what you pay. Value is what you get,’ and that “time is the friend of the wonderful company, the enemy of the mediocre.’ Thus, it is important for me to pick stocks that offer low P/Es relative to their industry, PEGs that are appropriate and have price to book ratios near 1.5 or less. This will insure that I will be getting the most “bang” for my “buck.” Of course, other reasons to invest exist as well. Companies that are run by stellar C-suites and have excellent CEOs will also be...
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