When buying a stock, focus first on paying a price less than what you can reasonably expect someone else to pay in the future.

This is the essence of value investing. It is a rule that also applies to other styles, including growth and technical analysis.

How one determines whether a stock is priced below its future value is subjective. In value investing, there are several approaches, all focused on comparing a company’s current valuation to some identifiable measure. Two well-known value investors discuss the valuation measures they use in this month’s issue: Mario Gabelli and Nancy Tengler.

I first met Gabelli many years ago by happenstance. I was perusing the exhibit hall at a conference, turned a corner and found myself facing him. Since then, I’ve had the opportunity to cross paths with Gabelli at a few different events, most recently at a conference in June.

Gabelli’s approach is based on Benjamin Graham and David Dodd, who emphasized the importance of buying at a margin of safety in their famous book “Security Analysis” (first published in 1934). The duo defined a margin of safety price as below a company’s liquidation value, which is the amount shareholders would receive if all of a company’s assets were sold and its debts were settled.

Gabelli differs from Graham and Dodd by considering a stock’s private market value instead of its liquidation value. Private value is what investors would pay for a publicly traded company if it were taken private or if its parts were split up.

When companies spin off segments, they provide financial data that can be used to determine the value of the segment being divested. Mergers and acquisitions (M&A) data can also provide benchmarks. The selling pressure by exchange-traded funds (ETFs) can temporarily push valuations of a divested business segment below its private market value. Still, determining private market value relies on making judgments that incorporate communication from a company’s management, as Gabelli explains in his article.

Tengler, whom I met for the first time earlier this year, values companies based on how their current price-to-sales (P/S) ratios compare to their historical range. It is similar to the approach used by Geraldine Weiss to value dividend stocks. Weiss compared a stock’s current dividend yield to its average high and low yields of the last seven years. Tengler looks at how much investors are paying for a unit of sales compared to the market and to the stock’s history.

Tengler considers relative dividend yield as well. In both cases, a valuation near the bottom of the historical range is desirable.

Price to sales is an easily accessible metric. It is also a ratio you can easily calculate yourself. One advantage of using sales instead of earnings is that revenues are harder to manipulate. Read our interview with Tengler.

Wealth Is Just One Part of Life Well-Being

This month’s issue features a third person many of you are familiar with, behavioral finance expert Meir Statman. I had the opportunity to catch up with him in person in June.

Statman discusses the role wealth plays in life well-being. Though—as a nonprofit organization focused on empowering individual investors—we focus on building and maintaining wealth, wealth itself is just a tool. It provides food, shelter, entertainment and independence.

Life well-being, as Statman puts it, “comes when we live satisfying lives, full of meaning and purpose.” It occurs when people are not solely focused on financial well-being but rather “accepting that it is our overall well-being in our life well-being portfolio that matters.” 

Wishing you prosperity and health,