TJS Partners, Inc.

The rising tide lifts all boats.  But as the other saying goes, “You can’t tell who’s swimming naked until the tide goes out.”  The securities owned by value investors are not propped up by high expectations.  In fact they typically have very low expectations, if they are not ignored altogether.

 Ben Graham understood that an asset or business worth $1 today could be worth 75 cents or $1.25 in the near future.  He also understood that he could be wrong about the $1 value today.  There being no advantage to buying $1 for $1 today, he concluded that the only logical way to protect yourself from a decline in value was to buy at a substantial discount.  The margin of safety is always dependent on the price paid.  For any security, it will be large at one price, small at a higher price and non-existent at some still higher price.  Warren Buffett described the concept in terms of building a bridge, “You insist it can carry 30,000 pounds, but you only drive 10,000 pound trucks across it.”

How can value investors be certain they are investing at a wide enough margin of safety?  By doing the following:

 -Being conservative in their estimate of intrinsic value.

-Giving far more weight to near-year earnings and far less weight to earnings (particularly when the consensus is for much higher earnings) many years into the future.

-Being cautious about ascribing values to intangible assets.  Think about Polaroid, Kodak, Blockbuster, Walkman, Tab (soda), Barnes & Noble and Borders Books, Dow Jones (eaten up by Bloomberg), World Book and Encyclopedia Britannica.  Few enterprises have truly enduring franchises.

-Replacing current holdings as better bargains come along.

-Maintaining the discipline to sell when the market price approaches full value (not waiting for every last nickel or waiting for a new investment to come along before selling an existing one.

-Being willing to hold cash until attractive investments become available.

-Paying attention to why (not just whether) an investment is undervalued.

-Seeking investments that have a catalyst or reasonably defined pathway for value to be unlocked.

-Giving preference to investments with shareholder oriented management with a personal financial stake in the business.

-Being reasonably diversified (10-15 investments) and hedging when it is opportunistic or cost effective to do so.