Finding Bargains

The process of intelligently building a portfolio consists of buying the best investments. Making room for them by selling lesser ones, and staying clear of the worst.

The raw materials for the process consist of:

1. A list of potential investments.
2. Estimates of their intrinsic value.
3. A sense for how their prices compare with their intrinsic value.
4. An understanding of the risks involved in each, and of the effect their inclusion would have on the portfolio being assembled.

Create a list of investment candidates meeting a set of minimum criteria, and from those choose the best bargains.

Potential bargains usually display an objective defect.

Bargains are usually based on irrationality or incomplete understanding.

Bargains can be created when an entire asset class goes out of style.

Fairly priced assets are never our objective since it’s reasonable to conclude they’ll deliver just fair returns for the risk involved.

Our goal is to find underpriced assets.

Where should we look for them?

A good place to start is among things that are:

• Little known and not fully understood.
• Fundamentally questionable on the surface.
• Controversial, unseemly, or scary.
• Deemed“inappropriate” for “respectable” portfolios.
• Unappreciated, unpopular, and unloved.
• Trailing a record of poor returns.
• Recently the subject of disinvestment, not accumulation.

Since bargains provide value at unreasonably low prices, and thus unusual ratios of return to risk, they represent the holy grail for investors.