With my investments I adopt Ben Graham’s definition of an investment operation, as detailed in his 1934 book Security Analysis:
“An investment operation is one which, upon thorough analysis promises safety of principal and an adequate rate of return. Operations not meeting these requirements are speculative.”
In-line with this definition, my investment criteria are broken into two parts:
1. Safety of principal
An issuer’s insolvency is the easiest avenue to loss of investment principal. Consequently, I look for companies and debtors with low debt levels, high liquidity ratios, and robust cash flow prospects.
2. Adequate rate of return
In my view, a low investment price relative to valuation is the best guarantor of an adequate rate of return. Furthermore, a calculable valuation requires a security with forecastable cash flows to be considered for investment. Security prices have been shown to be more variable than the security’s underlying cash flows. The occasional disconnect between price and cash flows provides my opportunity set, and I seek to invest and divest those securities priced outside my valuations.