This past week, I was considering buying a home near my parents so that when I was back in area, I would have a place from which to work and live. With the real estate market falling to 2004 prices, on average, it seemed a good time to buy (value investing is not limited to stocks – it’s a business philosophy). Anyway, I made an opening offer roughly 10.6% below the list price, which was more than reasonable given the current economic environment, the fact that I don’t need a property per se, and my outlook for real estate values over the next five to ten years. Continue reading ...

The price to earnings ratio is the most popular financial ratio, but it doesn't factor in growth. There's another tool used by professional investors known as the PEG ratio that overcomes this shortcoming. Learn what it is and how to calculate it ...

Someone wrote asking why business owners seem to make a lot more money and build wealth faster than those who make large amounts out of the gate (lawyers, doctors, et cetera). I thought the answer might be useful to those of you who want to do more than invest, but want to grow very, very rich.

The reason has to do with something known as capitalized earnings. When you own a business that earns, say, $2 million per year, it’s a pretty good guess that you could sell the company for $20 million or $30 million plus you have that cash flow that will let you invest or spend. Now, if you had to actually make that money, because of the way the tax laws are written, you’d actually have to generate somewhere between $31 million and $46 million. It's a whole lot more difficult to make $46 million pre-tax than it is to build a business that makes $2 million.

It really is that simple. That's not to say it's easy, but it is simple.

Today, I was reading the 1940 Classic edition of The Intelligent Investor by Benjamin Graham and was struck by one of the passages. In it, Graham - who was the famous father of value investing that went out to produce about a dozen students that became obscenely rich using his methods including Walter Schloss, Warren Buffett, and Bill Ruane - explains that the way to make money in the market is not through an astronomically high IQ or connections, but rather a psychological temperament. Here's what he said:

The investor cannot enter the arena of the stock market with any real hope of success unless he is armed with mental weapons that distinguish him in kind - not in a fancied superior degree - from the trading public. One possible weapon is indifference to market fluctuations; such an investor buys carefully when he has money to place and then lets prices take care of themselves. But, if the investor intends to buy and sell recurrently, his weapons must be a frame of mind and a principle of action which are basically different from those of the trader and speculator. He must deal in values, not in price movements. He must be relatively immune to optimism or pessimism and impervious to business or stock-market forecasts. In a word, he must be psychologically prepared to be a true investor and not a speculator masquerading as an investor. If he can meet this test, he will be a member not of the public at large but of a specialized and self-disciplined group.