ValuFocus Investing: A Cash-Loving Contrarian Way to Invest in Stocks

Chapter 10

The Pros and Cons of Various Methods and Models

Why Price Level Matters

Why does price level matter? It's simple.

The answer: Without a deep understanding of the intrinsic value of the stock compared against current market price, we cannot know what the likely price change will be. All studies show that all we can project with some degree of certainty is the future migration of market price to intrinsic value. Intrinsic value stems from the current business practices continuing. To enhance our knowledge, we can project the changes in future performance, working from history and judgment, but this always will contain uncertainty.

We believe, supported by our extensive empirical research, that price does not always equal intrinsic valuation. The market is not perfectly efficient. With an information advantage to quantify intrinsic valuations accurately, you can trade with less informed people to beat the market. We do know that market price will migrate to an accurate intrinsic value. We also know that for most businesses (80 percent), previous operational performance indicates future performance. Being right 80 percent of the time will make you a good investor.

And you don't need to compete against high-frequency traders with their whirring computers, who are trying to squeeze out the last penny of price momentum. In fact, flash crashes provide immense opportunity to profit at the expense of these traders. You just need to know accurate intrinsic valuations, because these ...