Price is what you pay, value is what you get.
Our approach to investing involves determining intrinsic value and investing in situations where the market has not yet recognized the value we are seeing through our analysis – when the current price is below our estimate of intrinsic value. The share price moves higher as the market begins to price in the value, generating returns for the holder.
An additional benefit of buying at a discount to value is that as well as locking in potential returns, the lower the purchase price, the higher the buffer against potential risk associated with the investment. Should markets drop, a mispriced security may not have as far to fall. In aiming to protect and grow wealth over the long term, it comes down to holding a security for as long as it takes for the value to be realized and priced in by the market – in equities this may take years.
Investors should keep in mind that a company’s intrinsic value is set by its cash flows from existing assets, future growth and risk profile. On the other hand, stock prices are driven by market moods and momentum. Stock prices tend to fluctuate far more widely than underlying asset values which provides opportunities, because eventually underlying value and price converge…
The Pender equity investment process is focused on identifying high quality companies with sustainable competitive moats and strong, proven management teams. Ideally these types of businesses can be acquired at a sizeable discount to intrinsic value and assuming things go according to plan, they compound capital for a long period of time.
We’re marking the holidays with the 12 Days of Investing the Pender Way. Short posts in which we share some of the key tenets of our investment process.