Using fundamentals to identify value opportunities - how to avoid the pitfalls

In this article series, I have introduced the concept of a value opportunity – where an investor is able to purchase part-ownership of a business for less than it is worth. Successfully doing this requires being able to estimate the value of a business. While no one knows the true value of a business since it depends on an unknowable future, a company's fundamentals can give a strong indication of what this may be. Value Investors will look at the asset value, earnings or growth to determine an estimate to compare to the current market price. The academic evidence and the example of many great investors show that when this is done well, it is a highly profitable strategy. However, like every strategy, there are pitfalls that may derail it. Because of the nature of Value Investing, the mistakes that investors make tend to be similar and are often rooted in the common errors we all make when analysing complex situations. Here are the biggest ones that Value Investors will want to avoid:

Insufficient Margin of Safety

Company valuation involves many assumptions about the future that may or may not be correct. Even with asset-based investing, investors are assuming assets can...