Like many borrowed terms that become overused marketing cliches, Margin of Safety (made popular by Ben Graham in his almost 100-year-old book Security Analysis) has many interpretations. These include low valuation multiples, discount to intrinsic value, or an assessment of likelihood to lose money. Contact owns some low multiple stocks, but only after the businesses have passed our 6-step process, of which valuation is one. This means our team believes the stock represents a quality investment because we understand how the business makes money, that it will generate attractive levels of income, has a strong financial position, an aligned management team, acceptable ESG credentials, as well as an attractive valuation.
Value Investing in Quality Companies is a successful combination
Companies trading on low valuation multiples are often dismissed (now more so than ever given the decade long outperformance by growth indices over the value style) as reflecting business weakness either due to industry or stock specific factors.
Obviously, a naïve investment process of simply buying low P/E stocks is weak, as would blindly buying growth stocks because they have momentum or are, by definition, popular. History has taught us that “Value” investing fails when business earnings are actually even weaker than what is factored into the relatively low valuation multiple.
Contact owns some relatively low multiple stocks, but only after the businesses have passed our 6-step process, of which valuation is one. For a stock to make it into portfolios, our team believes the company represents a quality investment because we understand how the business makes money, that it will generate attractive levels of income, has a strong financial position, an aligned management team, acceptable ESG credentials, as well as an attractive valuation.
