Sep 20, 2007
Three Factors for a Balanced Investing Approach
Lately I’ve become interested in studying some of Martin Whitman’s past investments. Here’s something I found particularly interesting from their 1998 annual letter to shareholders. I believe that these rules are important for all successful investors.
1. The quality of resources in a business, i.e., the financial strength to be able to either expand, acquire, or refinance, businesses; or to withstand future adversities
2. The quantity of resources in a business relative to the price paid to acquire equity interests. This is akin to Graham and Dodd’s net asset value, or book value, but the accounting figures are almost always adjusted to reflect a more realistic value for assets – e.g., real estate appraisals for income producing properties, or equities in loss reserves for certain properties and casualty insurance companies.
The quality of resources and the quantity of resources are then translated into another factor.
3. The prospects for long-term wealth creation.
The best investors on Wall Street: - Warren Buffett, Carl Icahn, Richard Rainwater, et al – all seem to use the three-pronged balanced approach described above in their investment activities. All are control, or elements of control, investors who do not try to predict market prices but rather take advantage of stock market prices whatever they may happen to be at a moment of time. The goal of these control investors seems to be to determine what a business is worth and what the internal dynamics of the business might be. Then they stop.