All investors hope to find a bargain. Conventional investors measure value by looking at factors relating to the market, price. Buffett urges you to look only at the fundamental worth of the business.
Investigating the business
Valuing a business involves assessing the quality of its customer franchise and management, about which market rating tells nothing.
Valuing a Business
* Make sure you understand the business thoroughly.
* Ask whether the business has consistently increased
sales and operating profits over time.
* Determine if it is reasonable to expect this consistent
performance to continue into the distant future.
Are you able to rate management's quality? You have a better chance of judging how well a business is run, and its likely future performance, if you focus on firms that are within your personal knowledge - including any that you know well through direct personal contact. Do all the research you can:
* Buy a few shares in any business that interests you and attend the annual general meeting to get a look at the management.
* Read all you can about the business, especially its management, in press clippings, on the Internet, in its annual reports, etc.
* If possible, use its products and services, rate them against competitive products and services, inspect its premises, and test its responsiveness to customers.
Assessing financial value
When you are as confident as possible that the business you have studied has good long-term prospects, you move on to the next stage. How does your assessment translate into financial value? And how does that valuation compare with the market price? Remember that unless the latter is markedly below your judgement of the true, or intrinsic, value, you should not buy.
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