The most traditional mainstream value strategy derives from a relatively strict interpretation of Graham and Dodd techniques. There is an emphasis on asset rich companies trading at a deep discount to net asset value marked to market and complicated companies, often conglomerates, priced at a deep discount to the Sum of their Parts. An asset based Margin of Safety that should limit the downside is an essential element of any investment.


The emphasis again is on asset related value but with the additional refinement that companies in this portfolio should be in the process of recovery.  Usually the business has experienced some sort of problem and is out of favour with financial markets so the share price is depressed. The strategy is contrarian to the core. A Margin of Safety in the underlying assets or business values provides the defensive side of the strategy. Identifiable recovery potential provides the upside. This strategy seeks out investments that have turned the corner but where this improvement has not yet have recognised or accepted by the market leading to a gap between perceived value expressed in the price of the security (both debt instruments and equity) and intrinsic realisable value.


One important signal of value is when a company is capable of paying a sustainable dividend to its shareholders where the yield is at least twice the market average.  High yield often occurs at companies that are also cheap on a number of other valuation metrics such as EV/EBITDA, Price/Sales and sometimes but not always Market/Net Asset Value. While a discount to assets is helpful free cash flow to pay dividends with enough left over to reinvest in a growing business is the most important measure of value. This methodology can incorporate holdings in asset light sectors as well as more typical value stocks where a high yield is accompanied by a discount to NAV. One added advantage of a high yield strategy is that it comes with a natural hedge, the dividend.


The value proposition of this strategy arises from an exceptional potential for gain.  Most value investors focus on finding a Margin of Safety to minimise the downside. Value Speculation accepts that the maximum downside in an investment (at least in respect of long positions) is 100% and seeks to identify opportunities where the upside is 200% or more creating a Margin of Safety in a diversified portfolio through an attractive risk/reward profile.  In effect this approach is the inverse of traditional value. Value speculation offers investors a more aggressive interpretation of value investing. Clusters of suitable candidates tend to be found in the natural resource sector, among technology companies, as well as in business that are in the process of restructuring their operations or engaged in financial engineering.


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