Warren Buffett, the oracle of Omaha, is the greatest investor of all time. His disciplined approach of buying and holding undervalued investments until their true value surfaces has amassed him a fortune of over 40 billion dollars. His investment coups of Coca Cola, American Express, and many others from this approach are legendary. But as legendary as they are, and as simple as they seem in hindsight, they are difficult to imitate. However, at mystockguide.com, we figured that if we carefully examine Buffett’s investments and approach, we can all be better investors. In this part 1 of a 3 part series, we examine one type of investment that has made a lot of money for Buffett, and see if we can find an investment in today’s market that matches this type.

“Bargain Issues”

Benjamin Graham, the father of “value investing” and Buffet’s advisor, always took a quantitative approach to investing. Graham didn’t really want to understand too much about the business of his investments. All he needed to do was look at the balance sheet and the income statements to decide if he wanted to buy.

One of Graham’s favorite types of stocks were “bargain” issues. “Bargain” issues were stocks that traded at a discount (usually less than two-thirds) to its liquid book value. Buffett in his earlier years made a killing buying these types of stocks. Sanborn Map, a map business that was going through some troubled times, was a perfect example. Sanborn had an investment portfolio worth about $65/share, but its stock was trading at $45/share. In 1958 and 1959, Buffett accumulated Sanborn’s stock until he had put 35 percent of his investor’s assets in this one investment. Much to Buffett’s chagrin, Sanborn’s stock did not rise. So, Buffett became a director and pressured the management to use its investment portfolio to increase shareholder value. Finally, after some resistance, the management took Buffett’s advice and bought out the shareholders. Buffett made about a 50 percent profit.

In today’s market, with stock screeners and with an abundant amount of research available, it’s much harder to find undervalued stock strictly based on the balance sheet. Or is it? At mystockguide.com, we have found a number of opportunities in 2003 in the hotel industry. One example is Prime Hospitality Corp (pdq). Prime controls three major hotel brands, AmeriSuites, Wellesly Inns & Inns, and Prime Hotels and Resorts. Because of the downturn in tourism after 9/11 and the dismal economy, the hotel industry, including Prime, suffered. In early 2003, the stock went to below $5, but it had a book value of $15. Unlike a lot of its competitors, Prime had a relatively low amount of debt. Now as the market has moved up throughout 2003, Prime is back to $11, but is still below its book value.

Like any investment, the “bargain” issue can be risky, if the company is consistently losing money and is in an unprofitable business. But if the company has temporary setbacks, like in the case of Prime, the investment can be very profitable. So be careful and make sure you do your research before plunging into an investment.

|