Ben Graham had come with a paradigm shift, using today’s strategic terminology. Stocks had been seen through their ticker symbols: paper vehicles to make money in the future, relying on some emotional expectations of the price going up, luck, hype, and above all, Mr. Market’s moods.
The paradigm shift was significant. It simply devised that a stock symbol represents a company; a business in other words. For the stock price of that business (its ticker value at Bay Street, Wall Street, or any other “street” for that matter) to go up or down, keeping Mr. Market’s modes aside, something has to happen in that business.
The analysis goes even deeper. Before allocating capital to a “symbol”, an investor must know if the business behind that symbol deserves what it is being sold for. Very simple, just like grocery shopping. One wouldn’t buy a pound of tomato for $100, or a gallon of milk for $50. Yet investors do that, till today, in stock exchanges around the globe.
The reader would wonder: Why? Because they rely on second-hand information, which blows the actual value of a stock out of proportion, and then fuel that with hype that the price would go even higher. We all know too well what happens next.
Ben suggested that before you allow yourself to buy a stock, find out what its “Intrinsic Value” (IV) is. Does that gallon of milk deserve $50? Of course not. Then how much? The IV of a gallon of milk is around $3. That is common knowledge. Finding out the IV of a stock is not common knowledge. It requires deliberate research. However, that work is essential to making informed investing decisions.
To be continued…