Solomon Neuhardt Reveals the Best of Value Investing – Part 6

What creates opportunities in the stock market? Most people are constitutionally oriented to buying lottery tickets. They love to buy the dream. When money pours into the dream it is leaving other areas. It is those people who are chasing after the get rich quick opportunities that create opportunities for the plodding careful investors. The careful investor buys stocks over time rather than all at once.

When mutual fund first opens and has little money in it, the fund manager is able to outperform the broader market because they are not hamstrung by large amounts of cash they need to invest. If the fund performs well then cash starts to flood in and the manager is usually stuck with investing like the broader market and is usually not able to outperform it. A manager may then be faced to take on more risk, possibly resulting in large losses and not coming even close to matching the S&P 500.

An important concept in value investing is margin of safety. For example, lets say you believe something is worth between $800 million and $1.2 billion. This is a range of intrinsic value because there is always uncertainty in the future. So would you pay a billion dollars for it? The answer should be no because this is in the range of what you believe it’s worth and doesn’t