investing / 2 posts found

What happens when management fails?

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The Art of Management

Capital efficiency

In principle at least, the main function of management is the efficient use of capital in everyday decision making. Managers have to satisfy three main beneficiaries of the company, namely the employees, bondholders, and the investors. Company employees benefit by earning a salary, while bondholders gain by receiving interest on their held bonds. However, both these beneficiaries are more concerned with short term gains, whereas investors, who are the residual owners of the company, are more concerned with long term gains. Investors receive benefit from the company by either receiving a cash dividend, and/or capital gains on the price of the stock.

What is Value Investing?

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The idea of value investing is credited to Benjamin Graham in his 1934 book “Security Analysis.” In the book Graham spoke of two essential qualities: The degree of safety of principal, and a satisfactory rate of return. In his margin of safety principle, which Warren Buffett later adopted, Graham noted that there should be a sufficient difference between the price of a stock and the intrinsic value of a company. A buying opportunity would be when the price is at least lower by two-thirds of the intrinsic value of the company to provide a sufficient safety cushion. The intrinsic value is obtained by multiplying the estimated earnings of a company by an appropriate capitalization factor then adding the net real assets of the company.