I like to invest in businesses. Naturally it seems like the most logical choice when it comes to an investment. Usually provides an inflation hedge and puts your hard earned money to work. I like to go through my own process when I filter through companies. It's very important that you have your own investment principals in place when you decide to start investing. This seems like common sense, but surprisingly many people don't employee a simple checklist before they take the plunge. Mine is a slightly modified one from Phil Fishers 15 points (If you don't know what Phil Fishers 15 points are www.stevensfirstprinciples.com/new/stevensfirstprinciples/philip%20fisher%2015%20points.pdf
Warren Buffet likes to look at companies financial statements, creates an approximate value in his head, and then looks at how much it is actually selling for. My financial skills aren't as tuned as his, so I like to look at it from a different view. I like to look at how much a company is selling for and then take the view of how much time, money, and human capital it would take me(or someone else) to build a stronger company.
It's a great screen for me when I'm looking through 100's of companies, but there are a lot of times it doesn't work. There are some great companies out there that take little financial analysis to realize. The real key is knowing how much you would pay for these great companies. Take for example Amazon. You might have an opinion on whether the company is overpriced or where it is going to head in the future, but it's really hard to make an argument that it isn't a great business. On top of that, it is coupled with amazing management. Jeff Bezos is retail's Steve Jobs. But the question remains, how much would you really pay for this company?
The industry usually uses 2 methodologies to value companies. The comparison approach (P/E, P/S, P/BV...ect) and DCF (discounted cash flows). The more ambiguous the companies prospects are the harder the valuation becomes which usually leads to people using multiple models to come to a conclusion. In any case, it boils down the fact that valuation is an art and not a science.
My goal is to try to break it down as much as possible to make it a science. It's something I am working on and would like to keep this community updated. Commentary is most welcome.