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Is finding undervalued stocks still a mystery for you?

Do you know the story of the person looking under a street lamp for a coin that he lost? A passerby offered to help and asked where he lost it. The answer he received was that it was further up the street but there was no light there to search properly!

It is much the same in the stock market. People look for value amongst the arcane models and methods put out by academics and copied by the investment professionals. But they are looking in the wrong place.

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They are searching for value in terms of trying to answer questions such as whether or not a particular stock is 30 percent undervalued or 20 percent overvalued. Then they wonder why their performance is mediocre at best. Remember that around 70-80 percent of fund managers, the main people who use these methods, actually under perform the market.

The problem is that they are confusing various static definitions of value with value in terms of performance. No wonder finding undervalued stocks is a mystery for most people.

The aim of successful investing boils down to one thing—being confident that you will get a healthy return. In other words value for an investor needs to be tied to future performance and not whether it appears to be a bargain at the moment.

A key quote from Warren Buffett explains how he approaches this.“Unless we see a very high probability of at least 10% pre-tax returns," he wrote, "we will sit on the sidelines.” You might be thinking, “Wait a minute, Buffett gets a much higher return than this.” You would be right in thinking this.

The point is that this is really his worst case scenario. It is like locking in a minimum of 10 percent and leaving open the possibility of much higher returns which in Buffett’s case is an average of over 20 percent per year.

In other words, a true undervalued stock is first of all a quality company and secondly it is selling at a price so that under a margin of safety you can be confident of receiving a strong return.

This is precisely what Conscious Investor® does. It starts by identifying great companies in terms such as management performance, strong and consistent growth and minimum debt. Once you have decided on a particular company, the second step is to calculate the expected return over your investment period under your margin of safety. For example, you can calculate your performance over the next five years if the growth in earnings dropped by 50 percent from its past rate.

In this way Conscious Investor helps you hone in on companies that give you true value as an investor.


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