The death of Wall Street value investing legend Michael Price earlier this month prompted some reflections by one of his biggest fans, Real Money Columnist Paul Price.
"He was one of my earliest heroes when I was getting started in value investing,” Paul Price, who is no relation to Michael, wrote recently.
It’s heartbreaking to lose one of your heroes, and also an opportunity to reflect on the lessons that they taught you. In the case of Michael Price, writes Paul Price, his most important lesson was this: Make sure you understand the difference between a stock’s price and what it’s actually worth.
His approach, Paul Price writes, “was to ‘evaluate businesses on merits and facts, not emotion’; to subtract ‘bad news’ from the company's value; to do your homework on stocks using first-hand sources; to know your rights as a shareholder and use them; to know the power of good management; and to have a process."
In fact, "without that very basic information deciding on buy, hold and sell decisions becomes mainly a crapshoot."
This is the practice that Paul Price is referring to when he talks about “value investing.”
There are many approaches to making an investment. Instead of trying to use pricing data to predict what the market will do, value investors analyze the underlying companies to determine what the business is worth. Paul Price invests around that, rather than around the behavior of other investors, with the belief that the market will eventually reward good companies.
It’s the most important question in investing, Paul Price argues. What is this stock, or this company, really worth? All of your decisions around investing have to start there, and that analysis has to be based on good data and emotion-free analysis.
“For me, determining ‘normal’ is the first step in any valuation exercise. I rarely impose my own view of what multiple a stock should sell for, or what its yield should be. I simply use historical data on the same security to see where it typically traded over recent years ... If you'd don't have a good idea of what a stock is truly worth ... why bother playing it at all?”
