The Little Book of Bull's Eye Investing: Finding Value, Generating Absolute Returns, and Controlling Risk in Turbulent Markets

Chapter Seven

The Essence of Bull’s Eye Investing

Defining Value in Stocks

WE TRADE MONEY FOR stocks (or bonds or any investment) in order to (hopefully!) enjoy a positive return as the investment’s value increases, thus increasing our wealth. But let’s focus on stocks for the moment. The return is what draws us, whether we take the risk of an equity position or the safety of a dividend. This chapter’s lesson is that all-important formula for investors, which should rank right up there with E = MC2:

The return you get from an equity investment (R) is the sum of the dividend yield (Dy), dividend growth (G), and any change in valuation (in terms of P/E) that occurs over the holding period. The equation implies the reasons for investing in stocks (as opposed to trading or speculation) are:

• Investing in the stock of a company for the dividends
• Investing for growth in the valuation of the company
• Investing because of a combination of the two

This chapter first looks at investing in stocks for growth and then turns to investing in stocks for income. Then I look into the crystal ball (always a dangerous thing to do) and talk about timing your entry into the market. Finally, while the first two sections deal with investing, in the concluding section I look at trading.

Value, Value, Value

Every value manager and investor has his own formula, but all these formulas have their roots in the ...