Value Investor Toolkit- P/E ratio

How many times have you been watching CNBC or any other business news show and heard them talk about the Price to Earning Ratio? The price to earning ratio, P/E ratio for short is a valuation of a company's current share price compared to per share earnings. It is calculated as

P/E = Price per share/ earning per share

A high P/E ratio generally means higher forecast earnings growth and low P/E ration means lower forecast earning growth. Investors can use P/E ratio as a way to compare companies within the same industry. Different industry have different average P/E ratio.

You will commonly hear the word price multiple when talking about P/E ratio. That is because P/E ratio show how much an investor is willing to pay for each dollar of earning. Example a P/E ratio of 15 would mean that investors are willing to pay $15 for each dollar of earnings.

P/E ratio can be used as a beginning tool for an investor when deciding on which company to invest in but it should by no means be the only only tool used.

Legend of Investing- Benjamin Graham

Benjamin Graham, the father of value investing and of security analysis. He is the teacher of great investors such as Warren Buffet, Walter Schloss and Irving Kahn. He was a great teacher and great intellectual mind in investing, and he was also a practitioner. His returns have been documented at about 17% per year between the years of 1929 and 1956.

Graham was monumental in moving investing from random speculation to one that relied on evidence. He was one of the first to utilize P/E ratio, debt ratios, book value, current assets etc.

Graham along with his colleague David Dodd produced a text book known as Security Analysis, which it a must have classic for those who believe in value investing. He also authored Intelligent Investing, which Warren Buffet calls "by far the best book on investing ever written".

Legend of Investing- Warren Buffett

Warren Buffett, known as the Oracle of Omaha is hands down one of the greatest investors in history. He was an student of Benjamin Graham, co-author of Security Analysis and the only one to recieve an A in Ben Graham class. Buffett is chairman of Berkshire Hathaway, the former textile mill that Buffet has transformed into a massive conglomerate holding company with subsidiaries ranging from See's Candy to Burlington Norther Santa Fe Railroad. He has managed to average 21% returns in book value from 1965 to 2006.

Investment Philosophy

Buffett earlier philosophy was to look for "cigar butts", that means those down and out investments. He has since transformed into what he terms "focus investing". He seeks to acquire great companies selling below intrisic value and hold them for long periods. He only invest in business he understands, which led him to stay away from the tech bubble and subsequent downfall. He also insist on having a margin of safety.

Investor of the week--Seth Klarman

Seth Klarman is a value investor and portfolio manager at Baupost Group, a $7 billion investment partnership founded by him in 1983. Since its inception, Klarman has managed to guide the portfolio to gains of 20% annually. Klarman is the author of "Margin of Safety" a investing classic that now sells on Amazon in upwards of $900.

Investment Philosophy

Seth Klarman invests in everything from value stocks in the traditional sense to distressed debt, and liquadations. With that said, Klarman has no problem doing nothing on occasions as evidenced by his large cash holding during 2005 and 2006 and when investment opportunities are few. He also returned 5% of cash to his clients for lack of investment opportunities.