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Inside Longleaf's Value Metric

When setting expectations, price-to-value can be a useful guide.

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On at least a quarterly basis,  Longleaf Partners (LLPFX) publishes the portfolio's price-to-value ratio, which compares the prices of the stocks in the fund with management's appraisal of their intrinsic values.

The concept of a P/V ratio is straightforward and the essence of value investing. Longleaf attempts to buy each share of a business for at least a 40% discount to the managers' estimate of its intrinsic value. For example, if the average-weighted company in the fund traded at a 40% discount, the P/V of the fund would be 60. Historically, the fund has traded at around a P/V of 68.

In most cases buying a company near its intrinsic value means the company should appreciate at a rate close to its cost of equity or produce roughly marketlike returns. Because Longleaf is in the business of producing market-beating returns, managers Mason Hawkins and Staley Cates aim to beat the market consistently by purchasing shares in a business only when there is a large margin of safety between their estimate of the business' intrinsic value and its current price.

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Ryan Leggio has a position in the following securities mentioned above: LLPFX. Find out about Morningstar’s editorial policies.