The closer you can get to conceiving those types of changes and the higher the probability they might happen, the more likely you are to find big winners. That's largely a numbers-driven exercise, focusing on returns on equity, margins, and growth in key sales and profitability metrics—all in comparison with the competition.
We've identified more than companies—primarily in the U. Ideas come out of that all the time. Another thing I've done in my personal account is to buy one share of probably micro-cap companies, which is kind of my own customized research service.
The daily mail delivery is kind of a Christmas grab bag—you never know when an annual or quarterly that arrives is going to catch your eye. We follow in a disciplined way things like spinoffs, rights offerings, new equity issuance and buybacks. Controlling your process is absolutely crucial to long-term investment success in any market environment.
I grew up in the business with the basic assumption that I didn't need to worry much about macro issues as long as I had enough margin of safety from a cheap stock price. That's no longer a safe assumption, so we force ourselves to more fully assess the risks of Political, Economic, Social and Technological changes that could derail our thesis.
Using a nautical analogy, we're looking at the weather forecast to make sure our boat will be strong enough, not to pick the day to go sailing. Even our macro views stem largely from bottom-up work. We were interested in Fannie Mae in but first wanted to understand their credit risk better. We spoke with the ratings agencies and asked them what would happen if house prices fell. We just move on to where the micro is driving value. Historically, little volume transacts at the bottom or on the way back up and competition from other buyers will be much greater when the markets settle down and the economy begins to recover.
Moreover, the price recovery from a bottom can be very swift. Therefore, an investor should put money to work amidst the throes of a bear market, appreciating that things will likely get worse before they get better.
It's frankly an advantage to not get overly distracted by macroeconomic concerns, which can make it hard to pull the trigger on a great business when the opportunity presents itself. As a result, features of businesses we're tempted by typically include stable market shares, stable margins, pricing power and long data series, so we can evaluate how the business has performed through good times and bad.
We like concentrated industries with two or three primary players. As value investors, we are typically buying the underperformer. There are issues to fix, but the customers are rooting for you and the leading competitor, with high margins and a high stock price, is probably not going to go for the jugular.
What are the key drivers of the business and how are they changing? What is the company doing to position itself for that future, and what is it doing to operate more efficiently and effectively? How are they redeploying capital? Our view is that if you can get 85 percent of the way there by answering the big questions, don't waste your time on the last 15 percent because the marginal utility isn't worth it. You have to focus first and foremost on high-quality businesses that can't blow up and should grow in value over time.
At a basic level, the product or service being sold is critical to customers but is only a small part of their cost structure, and the customer relationship tends to be sticky and recurring. Generally, we end up in intellectual-property-based businesses that can price off of a value-add rather than some sort of cost basis.
We want the financial and business models to be transparent. In terms of competitive dynamics, we want to understand the value of the company's product or service to customers and the strength of its competitive moat. From an industry perspective, we ideally want to see long-term sustainable growth and secular tailwinds.
One [of my more common mistakes] would be ignoring the potential impact of leverage. In the grand scheme of things, being 10 percent off isn't that big a mistake, but when there's heavy leverage, it is. Common examples would be things like the loss of a giant customer, or market incursions from a powerful competitor. Given the outsized positions we take, we want in a disciplined way to contemplate those scenarios up front and pass on the investment if they're even somewhat likely.
Making judgments about management is important to us and something I think value managers tend to underweight. You can analyze something statistically, but if you expect to own it for 10 years, management is going to make thousands of decisions you can't predict and may never even know about, which collectively make earnings compound at a rate more or less than they would have otherwise.
Those things can add up over time to the difference between a great performer and an also-ran. I don't care how smart an analyst you are, you can't really know what's going on inside a business. We want to invest not only in highly capable managers, but also those with clear track records of integrity and acting in shareholders' best interest. I've learned over time that great management teams deliver positive surprises and bad ones deliver negative surprises.
I'm not interested, for example, in CEOs who appear personally greedy. I frequently ask CEOs how they measure success. They often speak about meeting the needs of their various constituencies, including shareholders, employees, customers, and the community. Many have said they measure their success by the rise in the share price. The closer they get to saying they measure success by growth in the company's real economic value per share, the more interested I am.
You can usually pick out the empire builders with that question alone—they tend to have a hard time zeroing in on a concrete answer. You must also check whether the contents are relevant for your learning as a beginner investor. The style of writing is another primary consideration. Choose something that you find easy to read.
So, look for something that talks to you in a simple and understandable way. Books to understand value investing Using the above criteria, we selected 7 books suitable for investors who wish to learn, practise, and profit from value investing. Most of these books can be purchased on Amazon and local bookstores. Buffett was mentored by Graham , both prominent personalities in the international investing community. The book has a revised version with commentaries from Jason Zweig, a renowned financial journalist.
Even so, it retains the original ideas penned by Graham 72 years ago that still hold true today. Value Investing for Beginners Value Investing for Beginners is a short and easy-to-understand book written by Ken Chee, a Singaporean value investor who currently holds a million-dollar portfolio.
Chee founded the company in during the Lehman Brothers crisis in the hopes of helping other people to create sustainable wealth through value investing. If you want an easy read, we strongly recommend this book. Invest Like Buffett for Parents Pauline Teo wrote this book in with the goal of convincing parents in Singapore to start investing for retirement.
A mother of two and a value investor who currently has a 7-digit portfolio, Teo strives to educate more people about the importance of investing to create passive income. Written in , this book explains in detail when you should buy and sell stocks, what dividends are, how to find good stocks , what conservative investment is, and how to develop an investment philosophy.
We suggest you get this book after reading an introductory one, like the first few above. An old book, One Up on Wall Street wants you to have the upper hand in investing and emulate the success of its main author, Lynch. The book also includes a checklist for your investments. Value Investing for Employees The title already speaks for itself. Published in , Value Investing for Employees aimed to help employees who lack the proper investment knowledge to become investors.
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