Motley Fool: 5 Secrets of Buying Dream Stocks at Bargain Prices

5 Secrets of Buying Dream Stocks at Bargain Prices

How to Build Your Financial Dreams On a Foundation of Value

These are challenging times for investors. The S&P 500 is still below its 1999 levels. That’s more than 7 years with no growth!

So if the market just goes sideways, how can you secure your financial future?

Invest the Warren Buffett Way
To grow your wealth in a flat market, you need pick good companies. And no one does it better than Warren Buffett.

Buffett is the ultimate value investor. His results are legendary. A mere $10,000 invested in Berkshire Hathaway in 1965 is now worth more than $30 million!

How to Find Great Value Stocks
My name is Philip Durell. I’m Lead Advisor of Motley Fool Inside Value. It’s my passion to help individual investors find great value stocks. I believe value investing is the key to building life-changing wealth.

That’s why value stocks belong in every portfolio. And it’s why every investor needs to learn to think like a value investor. As Warren Buffett’s long-time business partner Charlie Munger says, “All intelligent investing is value investing.”

5 Secrets of Value Investing
So how do you do it? Here are some of the secrets the legendary value investors use to find great bargains:

1. Buy When Wall Street Won’t — The big players on Wall Street are very short-term focused. They’ll often dump stocks just for missing one earnings estimate. But value investors favor a longer-term view. We can find hidden value in stocks that may be down as much as 30%, based on small news items and diligent research.

2. Own Companies, Not Stocks — Don’t buy “stocks.” Instead, become a business owner of companies with strong competitive advantages. Buffett looks for companies with solid financial performance managed by seasoned and savvy executives.

3. Beware of the ‘Value Trap’ —Don’t be fooled by judging stocks on price alone. Just because a former high-flying stock is selling for half-price doesn’t mean it’s a good value. The stock may have much farther to fall and may never recover. Without knowing its intrinsic value, or possible catalysts for turnaround, you can’t know if a low price is a good value or not.

4. Know the True Value —Price is what you pay, value is what you get. Cash flow is the real health of the business. As Buffett says, “Intrinsic value can be defined simply: It is the discounted value of the cash that can be taken out of a business during its remaining life.” Discounted Cash Flow (DCF) is a powerful tool to help you know whether to buy, hold, or sell. (We offer our subscribers a unique DCF calculator on our website that makes this simple to do.)

5. Don’t Overpay for Growth — It’s not true that value stocks can’t be growth stocks. Growth is a component of value. It’s just that value investors don’t rely on growth. Value investors minimize risk by looking at the worst case first. They choose investments with a built-in margin of safety. That’s why value stocks are the best way to follow Warren Buffett’s famous rules: Rule No. 1: Never lose money. Rule No. 2: Never forget rule No. 1.

As Buffett’s mentor Benjamin Graham wrote in The Intelligent Investor, “In the short-term, the market is a voting machine, in the long-term it is a weighing machine.” So as a value investor, you’re not waiting on a rising market to lift your stock — only for the market to realize your stock’s true worth. This is a much more certain way to make money.

Value Stocks Earn Market-Crushing Returns
Value beats every other type of stock investing across all types of markets hands down. Value stocks returned an average 12.6% annual return from 1926-2002, according to a study by Ibbotson Associates. $1,000 invested in 1926 would be worth more than $8,000,000 today!

Another study by Ibbotson looked at the period between December 1968 and December 2002. During that time value stocks returned 11.0% per year, growth stocks returned 8.8%, and the S&P 500 returned 6.5%.

At those rates
- $10,000 invested in the S&P 500 grew to $84,710.
- $10,000 invested in growth stocks grew to $175,200.
- $10,000 invested in value stocks grew to $346,300.
Value stocks beat growth stocks nearly 2 to 1 and beat the S&P 500 more than 4 to 1!

Invest Like the Masters
I follow the trails blazed by legendary investors such as Benjamin Graham and Warren Buffett. In their value-investing approaches, they've searched for companies with beaten-down stocks that still had solid management, free cash flow, and attractive assets.

To spot the great turnarounds, I constantly search the market for out-of-favor companies. I run numerous stock screens. And then, for the few select companies that make it on my Watch List, I run a series of metrics — including discounted cash flow (DCF) analysis — to give me my estimate of a company's intrinsic value.

Once I have the fair value, based on my required margin of safety, I sit back ... and wait patiently. I then wait for the share price to drop below my “Buy Below” price. This gives me a margin of safety for my investment. When I spot such a bargain, I buy. Then I again patiently wait, this time for the market to recognize the stock’s real value. It usually doesn’t take long until the market drives up the price of the stock to levels at or above my intrinsic value estimate.

In short, I seek good deals at great prices. Having a margin of safety allows me to minimize the risk while aiming for solid returns.

Get Great Stocks at Bargain Prices
Buying great stocks at bargain prices is the surest way to get rich. You’ve estimated your profit before you put down your money. Value investing is the polar opposite of speculation. You squeeze out risk at every step. Then, you can buy a dollar’s worth of value for as little as 50 cents because you know what you’re buying. You’re not basing your decision just on price, but the intrinsic value of the company you’re buying. That’s why…

Value Investors Sleep Well
If you’re like many investors, you’re still recovering from the tech wreck. You’re painfully aware that it takes a 100% gain just to break even after a 50% loss. That’s why you want to avoid losing money at all costs. Value investing is the best way to find safe stocks. And they’re the best way to make great profits across all types of markets.

To Buffett all intelligent investing is value investing. It’s the art of finding great stocks selling below their real value.

But finding authentic value stocks is anything but easy these days. There are hugely profitable companies, but they’re priced too high. And there are many once-great companies that look cheap, but are actually traps that aren’t even worth their new lower price.

And judging a stock’s real value is no simple feat either. In the age of Enron, company insiders have made an art form of disguising their true financial health.

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