Intrinsic value is the cash generated by an investment until it matures (fixed investments) or over its business life (equity investments). Intrinsic value is earned in the future as dividends, interest, and principal are paid or as retained earnings are successfully reinvested.

When buying, we never confuse intrinsic value with market price. Market price is what we pay. Intrinsic value is what we get. Market price may be found quoted daily by various news services. Intrinsic value is determined by investment cash flows. Market price, it follows, is not a barometer we would use to evaluate corporate performance. Our evaluation of corporate performance is based on items such as income, assets, and return on capital. We view the stock price of a publicly traded company simply as a record of what others – well informed or not – were willing to pay for it at various times in the past.

Intrinsic value is such a critical concept because it is the only reference point for what an investment is actually worth, and therefore, whether or not the market price is fair, high, or low. Two facts support this view. First, the theoretical point that an investment is worth the present value of its future cash flows is self-evident and undisputed. Second, new era theories that have driven prices to speculative levels in the short run have always succumbed to the basic idea of intrinsic value in the long run.

Most of the time, intrinsic value will be somewhere near market price. At other times, especially for stocks, there may be a significant discrepancy. The potential for divergence is driven by two factors. First, intrinsic value is subjective. The quality of a valuation depends upon the competence of the person making it and the predictability of the investment’s cash flows. Second, market price is based on the prevailing opinion of the marketplace. This collective evaluation may be distorted by a preponderance of incompetent assessments or a variety of psychological factors, including fear, greed, and herd thinking.




A quantifiable margin of safety is the hallmark of sound investment.

For fixed income investments, (a) an issuer’s available resources must be significantly greater than the interest and principal due the investor, or (b) the assets backing an issue must be significantly greater than its price. The former applies to high-grade bonds, the latter to low-grade bonds.

For equity investments, (a) the intrinsic value of a company must be significantly greater than its price, or (b) the probability of achieving a desired return must be very high. The latter provides a perspective on value which may be applied to high-grade equities.




Investor portfolios must contain primarily quality investments. The portion which is not quality, by definition, will be subject to unpredictable and material loss. Therefore, we recommend that risky investments represent a very small portion of the investor’s overall portfolio. An all-or-nothing approach to investing is not for us.

We define quality at the investment level. The price of a quality investment is justified by a reliable stream of cash flows. Any other type of commitment is speculative.

Quality investments have two elements: (a) market price is commensurate with (or less than) intrinsic value, (b) intrinsic value is sound. An investment may have a very low price relative to its estimated value. However, it is speculative if the future cash flows which constitute its value have anything less than a high probability of being earned. Conversely, the intrinsic value of an investment may be very sound, but it is speculative if price is significantly higher than value.




True understanding is built upon high probability statements about businesses and values. It requires a dogged determination to get to the bottom of things and an equally dogged honesty about whether or not
we did.

Understanding is also relative. Achieving better than average returns requires understanding security values better than average. The problem is most investment managers believe they are better than average. Competence and honesty are the keys to assuring that we are not fooling ourselves. Competence means that we are capable of estimating business values and returns for both our portfolios and the markets in which we participate. Honesty means that we are candid about our relative return advantage or lack thereof.




Proper diversification is paramount to quality at the portfolio level. Proper diversification is achieved when the overall portfolio return is protected from unexpected adverse results in individual holdings, industries, or sectors.

Focused investing is a two-part process: (a) review as many opportunities as possible, (b) select only the best. Successfully executed, three benefits can be expected: (a) returns are enhanced by selecting investments with the highest probability of success, (b) risk is reduced by avoiding mediocre and poor commitments, and (c) knowledge is improved by concentrating the analytical effort.

The number of holdings required to balance the principle of diversification with the benefits of focused investing depends on our understanding of each investment and each investment's quality and value. A portfolio with a limited number of holdings is desirable when understanding, quality, and value-to-price are high. Conversely, a low-cost, more widely diversified approach to a market is appropriate when there are no clear advantages in understanding, and therefore, in our ability to evaluate quality or estimate value-to-price.




Risk is the chance of a disappointing return. Disappointing returns result from: (a) making bad investments, (b) selling good investments at the wrong time, or (c) establishing unrealistic return expectations. Adhering to these principles and communicating effectively with our clients are the keys to avoiding these elements of risk.

Investors must be able to evaluate an investment manager’s competence and strategy to avoid the first two elements of risk. Otherwise, they may invest with the wrong manager (making bad investments) or divest with the right manager (selling good investments at the wrong time). Evaluating competence is more difficult than it appears. Luck, risk, and a bull market can make an incompetent manager look brilliant. Conversely, every brilliant manager will under-perform at some time, and usually this is the best time
to invest with them. Investors must look beyond performance to evaluate manager competence: they must understand key investment principles and policies and review the investment decision-making process. To meet this standard, we regularly and candidly discuss our principles, strategies, decisions, and holdings with prospective and current clients.

Competence and honesty when calculating and discussing expected investment returns are the keys to avoiding the third element of risk. Client education is critical in this regard. It is incumbent upon us to explain the difference between intrinsic returns and market fluctuations, and to provide realistic expectations for both.

Lastly, before providing investment advise, we must know our client. We regularly review client circumstances and objectives, and recommend suitable strategies accordingly.