We believe that all of our methods are based on Benjamin Graham's basic strategy and teachings. We have studied The Intelligent Investor and Security Analysis, and understand his approach. We believe in no other way of investing - any method that is not based on value investing is merely speculating.
After reading Graham's writings, we spent time studying Warren Buffett's modifications and style. We believe that Buffett follows Graham's teachings extremely well and that is the reason he has been so successful. Buffett's greatest contribution to value investing are his guidelines for the selection of companies with good management.
Overall, Graham taught us the philosophy behind valuing a company and investing, while Buffett has shown an example of how to apply Graham's knowledge and has taught us how to be more critical of management.
We have developed this website and our own methods in an effort to modernize Graham's teachings, and we have updated many of his basic requirements of companies. For example, Graham suggested that defensive investors shy away from companies with less than $100 million in annual sales. We update that by requiring a market cap of $2 billion for the defensive investor.
Additionally, we use a number of different approaches to traditional terminology. Here is a short explanation of some of our terminology:
Intrinsic Value - We have developed a complex computer model to estimate the intrinsic value of a company. This model takes a number of factors into account including: PE ratio, Price to book ratio, Price to free cash flow ratio, price to sales ratio, and discounted cash flows. We believe the intrinsic value is the fair value of the company, and Mr. Market causes the stock price to fluctuate around this value (and profitable situations to exist).
PE Ratio - We do not believe in using estimates of future earnings to dictate the PE ratio of the company. We also do not believe it is prudent to base such an important ratio on a single year's earnings. Therefore, we take into account the previous 5 years worth of earnings before calculating our PE ratio. We do this for our other price multiples ratios as well.
Return on Invested Capital (ROIC) - We use Buffett's definition of Owner Earnings and Contributed Capital when calculating ROIC.