What is Value Investing?

As a value investor you look at the operations, not the aesthetics. The value is in the cash flow and the company assets. If the ugly yellow house produces the same income as the pretty blue house, they have the same Intrinsic Value.

Intrinsic Value is calculated using the Net Operating Income (NOI) and a multiple that changes depending on your industry and market cycle. To determine the Intrinsic Value of mobile home parks in 2018, for example, you take the NOI and divide it by an 8% CAP rate (and add in the value of any other assets).

A good deal happens when you can buy a company for less than the Intrinsic Value. That’s value investing. Companies, stocks, bonds, and buildings all have an Intrinsic Value because they produce income..

Oil, gold, diamonds, apples, cars, paintings, and currencies do not produce income. These items have no Intrinsic Value, so it is difficult to determine their worth. Consequently, their value can go up and down depending on the press and popularity. The value of these items is determined by the supply and demand curve, by scarcity and emotion.

It is our belief that cash flow is a more reliable value indicator than supply and demand. We choose to invest in properties that produce income, when we are able to purchase for below the determined Intrinsic Value.