ValuFocus Investing: A Cash-Loving Contrarian Way to Invest in Stocks

Chapter 13

Focusing on Price Formation

We call our methodology the stock price formation process (SPFP). Please think of it as a more accurate way to price a stock, based on being able to estimate the intrinsic value of the company.

In reality today, virtually all stocks are either over- or underpriced. That pricing doesn't derive from an absolute analysis of a company's underlying value. It is based on the relative movement of the market, subject to all that impacts investors by the minute—fear, greed, nervousness, excitement, breaking news, so-called expert opinion, and all the rest.

In contrast, our definition of an efficient market is to truly have most stocks priced near or at the fundamental worth of the business.

Of course, the key here is to be able to calculate intrinsic value accurately. This is best done by valuing the fundamental economics of the company—revenues minus costs—resulting in cash that is used to invest in growth and to reward investors. Importantly, valuations should be both unbiased and accurate—which we will explain in much greater detail.

It's all about money. Isn't that the case universally? Whether we're running a business or a household or our own lives, we survive, live, and grow by having money to pay bills, make purchases, and invest.

Businesses need cash to compensate the owners, managers, employees, and consultants; pay for supplies, equipment, facilities, and support; meet tax obligations; invest in research, new products, production, and marketing; ...