Value Investing – Concepts of Economics and Business Models (Lesson 19)
With value investing, understanding the concepts of economics allows for a more comprehensive elevation of thought related to financial analysis.
Value investing is a systematic process of purchasing high quality, intrinsic backed stocks at depressed market prices. Using financial analytics, allow time for market price recovery and then proceed to reap gains from an investor’s patience.
With value investing, understanding the concepts of economics allows for a more comprehensive elevation of thought related to financial analysis.
Chipotle Mexican Grill, Inc.’s current (01/24/22) market price is around $1,400 per share, trading as high as $1,930 late last summer (summer of 2021).
During 2021, the Value Investment Fund recorded an outstanding 41.08% return on its December 31, 2020 balance of $116,231. The Value Investment Fund ended 2021 with a balance of $168,430.
One year ago on January 12, 2021, the Value Investment Fund purchased its first tranche of Wells Fargo Bank. At that time, shares were purchased for $33.24.
Churning refers to agitating. It is commonly used with the dairy industry to refer to the process of turning liquid cream into butter. The churning process breaks down the fat membranes allowing the fats to join together. In effect, churning means to work the liquid into a solid. With investing, churning has two different connotations. The first is the more common negative connection to brokers getting their clients to buy and sell frequently in order to increase overall commissions for the brokerage. The positive connotation is rarely used and it refers to working one’s portfolio of investments to maximize overall return. That is what this lesson is about. How does a value investor work their portfolio to maximize overall portfolio return?
The ideal method to maximize return is buying low and selling high at the right time with investments that have quick recovery time frames. Ideally, all the cash proceeds from a sale should be immediately reinvested into new opportunities. Often, this is not the case. When the respective markets such as the DOW, S&P 500 or the S&P Composite 1500 experience highs, it is difficult to find good quality investments at low prices. This is further hampered when a value investment fund has limited options. In order to provide ample opportunities for reinvestment of cash, value investment funds require at least five pools of industries and a minimum of 40 stocks. The ideal fund will have around eight pools of potential investments with no less than 60 potential securities.
Today, the Value Investment Fund sold an options contract (PUTS) for 116.9591 shares of Huntington Ingalls Industries at $5.90 per share netting $4.90 per share.
As stated in October’s report, the Value Investment Fund created the Military Contractors Pool of potential investments and researched several opportunities.
During October, the Value Investment Fund continued to hold Wells Fargo as its only investment. During the month, Wells Fargo improved $5,166 over September’s ending balance, a 10.48% improvement.
The largest subsidiary of Huntington Ingalls Industries is their Newport News Shipbuilding division. They are the sole builder of the United States Navy’s aircraft carriers.
Today, November 30, 2021, the market saw a decline of 650 points with the DOW Jones Industrial Average. This pushed the price of Huntington Ingalls Industries lower by 2.32% below the predetermined intrinsic value of $185.