The 15 Essential Virtues of Value Investing

Five Virtues of Intelligent Investors

I. Patience

Patience is the rarest commodity on Wall Street, which is why it is so well rewarded. The intelligent investor understands the value of his investments and is patient to allow the market time to recognize that value.

II. Discipline

Having formed a conclusion from a careful review of the facts, and knowing that his judgment is sound, the intelligent investor has the discipline to take action, even though others may hesitate or differ.

III. Eager to Learn

The market is a great teacher for those who are eager to learn. The intelligent investor is one who is willing to receive instruction, acknowledge when he is wrong, learn from his error, and make the necessary correction.

IV. Harness Your Emotions

Warren Buffet, Graham's greatest student, has been quoted as saying, "Be fearful when others are greedy, and be greedy when others are fearful." Graham himself has said that, "While enthusiasm may be necessary for great accomplishments elsewhere, on Wall Street it almost invariably leads to disaster."

The intelligent investor who is able to harness his emotions will seize the opportunity to buy wisely when prices fall sharply and to sell wisely when the advance a great deal.

V. Think for Yourself

The intelligent investor will form his own ideas about the value of his holdings, based on full reports from the company about its operations and financial position. He will not permit himself to be stampeded or unduly worried by unjustified maker fluctuations or attention grabbing headlines. "Investment," says Graham, "is most intelligent when it is most businesslike."

Five Virtues of "Blue Chip" Companies

I. Large

Large companies typically have the resources in capital and brain power to carry them thorough adversity, and the market tends to respond with reasonable speed to improvements in their financial condition.

II. Prominent

Companies that have emerged from the competitive environment as leaders in their industry have usually done so through some combination of superior products, superior service, and superior management, and thus exhibit certain desirable characteristics for investment purposes.

III. Conservatively Financed

Two important considerations to determine whether a company is conservatively financed are (1) the amount of debt on its books (debt should not exceed 50% of total capitalization), and (2) the ability to cover finance charges (earnings should be able to cover interest charges by a multiple of five times or more).

IV. Good Credit

Companies that have paid dividends continuously for a considerable number of years (20 years or more) exhibit good credit because prior to declaring a dividend, they must have met all their other financial obligations.

V. Solid Earnings

In order to be considered a "blue chip" company, a company should  have positive earnings in each of the last ten years, and their earrings should generally be ten years, and their earnings should generally be growing over that period of time. The company's earnings should be substantial enough both to cover the dividend, and to reinvest in the future growth of the business.

Five Virtues of A Solid Portfolio

I. Quality

A quality portfolio is built around a core of "blue chip" companies that meet the five criteria, afford the investor a certain level of security regarding the probable income, as well as the probable safety of the capital invested.

II. Value

It is not enough to simply construct a portfolio of suitable "blue chip" companies. Those companies must also be purchased a suitable prices, specifically, at a discount to their intrinsic value, thus providing the investor with an additional margin of safety.

III. Diversification

Even with careful analysis of the quality and value of each asset in the portfolio, an individual security may still work out badly. For the careful analysis only improves the probability for profit rather than for loss— not that loss is impossible. But as the number of securities in the portfolio is increased, the more certain does it become that the aggregate of the profits will exceed the aggregate of the losses.

IV. Margin of Safety

A diversified portfolio of quality companies purchased at a discount to the calculated value allows for a margin of protection against loss under all normal or reasonably likely conditions or variations.

V. Adequate Return

An adequate return refers to any rate or amount of return, no matter how low, which the investor is willing to accept, provided he acts with reasonable intelligence. The intelligent investor does not enter upon an operation unless a reliable calculation shows that it has a fair chance to yield a reasonable profit.