Category: Stock Investing
When contemplating an investment, I might get excited about a company and want to immediately snap up shares of its stock. But I’ve learned that I should try to determine the value of the company and a fair price for the company’s stock before buying. As a general rule, I don’t want to pay more for a company than it is worth.
Going further with this idea, I may decide to invest only if I can pay less than the company’s value. If I adopt this philosophy, I buy shares of a company only when its price represents a bargain or discount from its value. That is, I incorporate a margin of safety into my investing decisions.
This idea of a “margin of safety” has been articulated and popularized by value investing thought leaders Benjamin Graham, the author of The Intelligent Investor, and Warren Buffett, Graham disciple and billionaire investor.
The margin of safety is always dependent on the price paid. It will be large at one price, small at some higher price, and nonexistent at some still higher price.” — Benjamin Graham, The Intelligent Investor
Investors are often involved in a quest to beat the market. That is, they want to make investing decisions that deliver performance results better than a passive investing strategy, such as one involving the purchase of market-index funds.
The Dogs of the Dow represents an investing strategy developed with the goal of outperforming the Dow, a market index. It involves using a simple formula to identify the top 10 undervalued stocks among the Dow holdings, which consist of 30 blue-chip stocks. There are derivatives of this strategy, also designed in hopes of outperforming the market.