Preservation of Capital

In the Intelligent Investor, Benjamin Graham used three words to describe sound investment:

  • Margin of Safety

 

What does this mean when buying a business?  It means that the purchase price should be lower than the intrinsic value of the business.  Therefore, the greater the discount to intrinsic value, the greater the margin-of-safety.

When allocating capital, the primary objective for value investors is to avoid permanent capital loss.  In Graham’s words, we are guarding against adverse developments in the future rather than looking to profit through prophecy.  Investing with a margin-of-safety is the best protection from potential adversity.

Value Investing is a life philosophy.  It is imperative that we always preserve capital and avoid any actions, personal or professional that can destroy value.

According to Paul Lountzis, inactivity is a key component to capital preservation.  He recommends investing only when you have a strong conviction to do so.  If there is uncertainty, then we should look elsewhere or default to cash.

Preservation of capital is the core value of our practice.

There is more to come on this topic.

 

 

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