Telefonica is the most recent addition to the Gracor portfolios.  What follows is an outline of the decision structure and a summary of the analysis.

Value investing is based on Benjamin Graham’s work on the principles of investing and investor behavior.  I hope that that this posting will help you understand how Gracor applies those principles.

Value Investing vs. Bargain Hunting

It has become fashionable for professional value investors to say that their style is to buy great businesses for 60 cents on the dollar.  Really?  Granted, this is a marketing statement and not a white paper on the subject, but I believe it is important for you to understand what is missing from this statement.

The missing part is why you are able to buy at such a significant discount?  Remember, it is not true that the market randomly coughs up a dollar bill for 60 cents.  To get a significant discount, something negative, and typically unforeseen, must occur to scare the market into overreacting.

Before buying such a bargain—even before in-depth valuation analysis—value investors should do the following two things.  First, they must understand the nature of the negative event.  Second, regardless of the nastiness of the event, they must ensure that the company has the financial and managerial resources to make it through.

What good is the most elegant spreadsheet on the company’s future valuation if it doesn’t recover?  As Benjamin Graham put it in his book, The Intelligent Investor, it is not as important for the buyer to be enthusiastic over the company’s long-run prospects as it is for him or her to be “reasonably confident that the enterprise will get along.”

Telefonica vs. Spain

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