WhatHasWorkedFundOct14Web

WHAT HAS WORKED IN INVESTING1. Low Price in Relation to Asset Value Stocks priced at less than book value arepurchased on the assumption that, in time, their market price will reflect at least theirstated book value; i.e., what the company itself has paid for its own assets. From timeto time, we also have been able to find stocks selling at discounts to net currentassets (i.e., cash and other assets which can be turned into cash within one year, suchas accounts receivable and inventory, less all liabilities), a measure of the estimatedliquidation value of the business. This was a stock selection technique successfullyemployed by Benjamin Graham.2. Low Price in Relation to Earnings Stocks bought at low price/earnings ratiosafford higher earnings yields than stocks bought at higher ratios of price-to-earnings.The earnings yield is the yield which shareholders would receive if all the earningswere paid out as a dividend. Benjamin Graham recommended investing in companieswhose earnings yield was 200% of the yield on AAA bonds. Investing in stocks thatare priced low in relation to earnings does not preclude investments in companieswhose earnings are expected to grow in the future. To paraphrase Warren Buffett,“value” and “growth” are joined at the hip. A company priced low in relation toearnings, whose earnings are expected to grow, is preferable to a similarly pricedcompany whose earnings are not expected to grow. Price is the key. Included withinthis broad low price in relation to earnings category are high dividend yields andlow prices in relation to cash flow (earnings plus depreciation expense).3. A Significant Pattern of Purchases by One or More Insiders(Officers and Directors) Officers, directors and large shareholders often buy theirown company’s stock when it is depressed in relation to the current value whichwould be ascribable to the company’s assets or its ongoing business in a corporateacquisition, or to the likely value of the company in the near to intermediate future.Insiders often have “insight information” — knowledge about new marketingprograms, product price increases, cost cuts, increased order rates, changes inindustry conditions, etc., which they believe will result in an increase in the trueunderlying value of the company. Other examples of insider insights are: knowledgeof the true value of “hidden assets,” such as the value of a money-losing subsidiarywhich a competitor may have offered to buy, or the value of excess real estate notrequired in a company’s operation, or knowledge of the likely earning power of thecompany once heavy non-recurring new product development costs stop. It is notuncommon to see significant insider buying in companies selling in the stock market atii