Value Investing

Value Investing Analysis Skill

Overview

This skill guides Claude to analyze stocks from a value investing perspective, following the investment philosophies of Benjamin Graham and Warren Buffett.

Core Principles

1. Intrinsic Value

The true value of a company is determined by the present value of its future cash flows. Always estimate intrinsic value using multiple methods:

• DCF (Discounted Cash Flow): Project future free cash flows and discount to present value
• Graham Number: √(22.5 × EPS × Book Value per Share)
• Graham Growth Formula: EPS × (8.5 + 2g) × 4.4 / Y

When values differ significantly, use the most conservative estimate.

2. Margin of Safety

"The margin of safety is always dependent on the price paid." - Benjamin Graham

Only consider investment when price is significantly below intrinsic value:

• Minimum: 25% margin of safety
• Good: 35% margin of safety
• Excellent: 50%+ margin of safety (verify no fundamental issues)

A larger margin of safety provides protection against:

• Errors in analysis
• Unforeseen business challenges
• Market volatility

3. Economic Moat (Competitive Advantage)

"The key to investing is determining the competitive advantage of any given company and, above all, the durability of that advantage." - Warren Buffett

Evaluate five types of moats:

1. Brand Power (Intangible Assets)

   • High and stable gross margins (>40%)
   • Pricing power
   • Customer loyalty

2. Cost Advantage

   • Lower operating costs than competitors
   • Process or technology advantages
   • Access to cheaper inputs

3. Network Effect

   • Value increases as more users join
   • Platform or marketplace businesses
   • High switching costs for users

4. Switching Costs

   • High cost for customers to switch
   • Embedded in customer workflows
   • Long-term contracts

5. Economies of Scale

   • Cost advantages from size
   • Distribution advantages
   • R&D leverage

4. Circle of Competence

"Know your circle of competence, and stick within it." - Warren Buffett

• Only analyze businesses you understand
• Acknowledge knowledge limitations
• When uncertain, mark it clearly in reports

5. Mr. Market

"Mr. Market is there to serve you, not to guide you." - Benjamin Graham

• Market prices reflect short-term sentiment, not long-term value
• Use price volatility as opportunity
• Focus on 52-week lows as potential entry points
• Never be pressured by market movements

6. Contrarian Investing

"Be fearful when others are greedy, and greedy when others are fearful." - Warren Buffett

• Look for quality companies experiencing temporary problems
• Avoid momentum-driven valuations
• Question consensus views

Analysis Framework

Step 1: Understand the Business

Before any numbers, understand:

1. What does the company do?
2. How does it make money?
3. Who are the customers and competitors?
4. What are the key risks?

Step 2: Evaluate the Moat

Analyze competitive position:

1. Is gross margin >40%? (Brand power)
2. Is ROE consistently >15%? (Quality business)
3. Has market share been stable or growing?
4. What would stop a competitor from taking business?

Step 3: Assess Financial Health

Check these metrics:

• Profitability: ROE >15%, ROA >10%, stable margins
• Safety: Debt/Equity <1, Current Ratio >1.5, Interest Coverage >5x
• Cash Flow: Positive and growing free cash flow

Step 4: Estimate Intrinsic Value

Use multiple methods:

1. DCF with conservative assumptions
2. Graham Number
3. Relative valuation as sanity check

Step 5: Calculate Margin of Safety

Compare price to intrinsic value:

• Current price vs. conservative intrinsic value
• Required price for 25% margin of safety
• Current distance from 52-week low

Report Guidelines

Language and Tone

• Be objective and data-driven
• Avoid emotional language
• Clearly distinguish facts from opinions
• Acknowledge uncertainty

Required Elements

Every analysis should include:

1. Current price and key metrics
2. Intrinsic value calculation with methodology
3. Margin of safety assessment
4. Moat evaluation
5. Risk factors
6. Clear recommendation
7. Disclaimer

Disclaimer Template

"This analysis is for educational and research purposes only and does not constitute investment advice. Investing involves risks, including the potential loss of principal. Past performance does not guarantee future results. Always conduct your own due diligence before making investment decisions."

Data Quality Standards

• Always cite data sources
• Use TTM (trailing twelve months) for earnings
• Require at least 5 years of historical data
• Flag any data anomalies
• Note data freshness

Common Pitfalls to Avoid

1. Value Traps: Low price doesn't mean undervalued if business is declining
2. Ignoring Quality: A cheap price on a bad business is still bad
3. Over-precision: DCF results are estimates, not exact values
4. Recency Bias: Focus on long-term trends, not recent quarters
5. Confirmation Bias: Challenge your own assumptions

Investment Wisdom

From Benjamin Graham

• "In the short run, the market is a voting machine but in the long run, it is a weighing machine."
• "The intelligent investor is a realist who sells to optimists and buys from pessimists."
• "An investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return."

From Warren Buffett

• "It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price."
• "Only buy something that you'd be perfectly happy to hold if the market shut down for 10 years."
• "Risk comes from not knowing what you're doing."
• "Our favorite holding period is forever."

From Charlie Munger

• "A great business at a fair price is superior to a fair business at a great price."
• "The big money is not in the buying and selling, but in the waiting."
• "Invert, always invert."