Chapter 15 of How To Value Invest Excerpt Part 1
Chapter 15: Conclusion: Challenge To You, How I Do Research, Mindset, Patience, When To Sell A Company.
“Nobody ever takes note of [my advice], because it’s not the answer they want to hear. What they want to hear is “Here’s how you get an agent, here’s how you write a script, … but I always say, “Be so good they can’t ignore you.” Steve Martin
“Unless you can watch your stock holdings decline by 50% without becoming panic-stricken, you should not be in the stock market.” Warren Buffett
I originally started my value investing blog, Value Investing Journey, and now this book, because of frustrations when I could not find any other single site, group of sites, or books that talked about the things that have been talked about in this book. Most value investing blogs will talk about the companies they think are good investments, show some basic valuations, talk about why they think the particular company is a good investment, and go into a little detail about the company’s operations.
This approach is fine if you already know how to value and evaluate companies but if you do not you are in for a very long, often times frustrating journey, through the infinite internet until you finally piece enough disparate information together to start the process of learning and implementing valuation techniques, thought processes, and how to properly gauge whether a company is a potentially good investment into your own repertoire.
The Value Investing Journey blog was originally started to keep a journal of my thoughts and valuation and analysis articles so that I could see what I was learning, how fast I was learning, and come back to that later to see how far I had come in the time since I started the blog.
There was one other major reason it was started, and why I eventually decided to write this book as well. I wanted to help newer to intermediate level investors who like me could not, or did not, want to go to a big time university to learn the techniques that have been shown and have talked about in this book so that you could jump-start your own investing journey a lot faster than the nearly 5 years it has taken me to gain the knowledge that I have.
Throughout this book and on the accompanying blog, I have shown and given you access to all the best information I have learned from that took thousands of hours and nearly five years to put together. I have shown you how to do the valuation techniques for yourself, talked about my investment thought processes, why I did what I did, and have given you all the tools and necessary information so that you can become a truly excellent value investor without going to college and without having to spend potentially tens or hundreds of thousands of dollars. While the potential money savings are great I also think that by following this book and the accompanying blog that you can save potentially thousands of hours of your precious time as well.
Now that we are coming to the end of this book the first thing I want to do is to tell you that if you have followed this book closely; have practiced the techniques, learned the terms, and have started learning from the some of the outside resources listed throughout this book and on the accompanying blog, that I guarantee you will now know more about how to value and evaluate whether a company is a good or bad investment better than most MBA’s and professional equity analysts while also saving hundreds of hours of time and tens of thousands of dollars. It does not matter how much knowledge you have gained though because if you do not apply the knowledge through practice you will not retain any of this information and you will not grow and get better as an investor.
When originally getting serious about investing I used to just read books and websites constantly while never taking any time to practice the techniques that I was learning. I never took the time to practice the techniques I was learning because I thought that I still didn’t know enough to start evaluating a company properly. Finally I realized that the reason I wasn’t improving at all was because I was not practicing valuing companies and was not retaining any of the information that I was learning from because of not practicing. Once again; if you do not practice what you are learning you will not retain the information, you will waste a lot of time having to relearn things, and you will not improve as an investor. Be confident in your abilities and go out there and keep practicing and getting better. If you are serious about becoming a much better investor faster, valuing and analyzing companies is not a once every month or so exercise. You need to practice constantly to keep getting better and to develop your own thought processes about what you think makes a company an excellent investment. No one else can answer that all important question for you, but you.
I highly recommend starting a value investing blog where you talk about your ideas and post your analysis for everyone to see. Starting my blog was the number one factor in me getting better as an investor. Starting a blog is a great way to keep track of your progress to see how much better you have gotten over time.
It is also a very valuable way to keep track of what has and has not worked in your analysis and thought processes because you can always go back to see what you need to improve on and where your thought process and analysis may have been flawed so that you can go back and fix those problems. It is also a very good way to keep track of things you have done right so that you can keep improving on those thought processes and analysis and keep integrating more of those positive results into your evaluations.
You may have noticed that I have never once in this book said that I will guarantee that you will make a lot of money from the knowledge in this book once you learn the techniques and valuations. In my opinion people who guarantee those kinds of things are selling you snake oil, should be viewed with skepticism, and should be ignored. You can put together a great valuation and analysis article and the company’s stock may end up going south fast and you could end up losing a lot of money even if you have a bulletproof analysis put together. You may also not put very much work into valuing and analyzing a company but end up getting lucky by the company that you just bought into getting bought out for a quick double or triple. Investing is a lot like poker where over the long-term luck does not play a very big role and generally the better players end up at the final tables a lot more often. But like in poker as in investing luck plays a pretty big role in the short-term.
For example you could find an exceptional company that is undervalued and you see it as a potential double or triple once its full value is realized. You could put a ton of work into the analysis, write-up a great analysis article, buy into the company and then boom the next day the stock market crashes and you are automatically down 50% the day after you bought into this company. This is why you must do proper research into an investment decision and put a lot of work into analyzing companies because if you did your proper due diligence and you still feel that the company is an exceptional investment this would be a perfect time to buy more of that particular company and now you would think that instead of a potential double or triple the company could turn into a four bagger plus.
The goal of this book is to get you to be a better investor for the long-term so that over time luck will even out and your skill will show. I have seen very prominent investors say that you should be happy if 4-6 out of 10 of your investments turn out well. The goal of this book is to give you the basis to become a .400 to .600 hitter when finding investments.
This book is about teaching you the techniques, valuations, and basic framework of how to become an excellent investor. These unfortunately are not the most important factors that will decide if you are to become an excellent value investor however.
Thought process, temperament, patience, having confidence in what you are doing, and willingness and dedication to continue to learn and get better are what is going to determine if you become a fantastic investor. It does not matter how much technique and knowledge of how to value and evaluate companies you have, although this will help greatly, if you are impatient, do not work to develop the proper thought processes for yourself, do not work to continually get better, and do not have the proper temperament you will most likely end up being a very bad investor and losing money. The following traits are of utmost importance if you want to become an excellent value investor.
Thought/Decision Making Process: Value investing is generally a very solitary endeavor where you put in a lot of hours of work by yourself to find one company out of hundreds that you think is going to be a good investment. During those probably dozens or hundreds of hours of research into one company you will have to determine a plethora of things on your own: If you think the company has a moat, if the company has a moat is it a big one and is it sustainable over the long-term, is it in a dying industry, is it a growing industry, are the companies margins and sales growing or declining, will the company be around in five years, can you trust management, is the company dominant or going to be dominant in its industry, and on and on.
The above examples are only a few of the many things you need to think about and to ask and determine for yourself before investing in a company. Even if you do have a mentor that you can bounce ideas and thoughts off of and ask questions of (I would highly recommend finding someone you can bounce ideas off of because it will help you become a much better investor faster) still only you can answer investment specific questions for yourself and how these things integrate into your own personal idea of what makes a potentially great investment. Outside of learning the terms, techniques, valuations, and how to evaluate a company, developing a proper thought and investment process for yourself is going to be the greatest investment you will make that will pay dividends far into the future. The faster you determine the best thought processes for yourself and how to incorporate those into an excellent investment analysis, the faster you will become a much better investor.
Patience, Temperament, and Confidence: I combined these three together because they are all needed in concert to become an excellent investor. Having patience in most things outside of investing is not the same thing as having patience when you buy into a company and its stock goes down 50% shortly after you bought into it. This is why you need patience, the proper temperament, and confidence all together.
I will go back to the example I used earlier to hit this point home. Let’s say that after reading this book and evaluating a few companies you find a company that is undervalued, has a stable balance sheet, quite a bit of cash on hand, not a lot of debt, is growing efficiently, has fantastic margins, and has at least a small moat. You think the company looks like a potential double or triple from today’s prices and its downside is protected at least partially by some land that it owns. All things look good in your eyes and you can’t believe that the company is so undervalued so you decide to buy into it and put 20% of your portfolio into buying stock in the company. A few days after you buy into the company the stock market crashes and the stock loses 50% of its value, what do you do? Panic and sell the company because you are afraid you are going to lose more money, wait and do nothing, remain calm and buy more?
If you did your proper due diligence this is when it pays to have written your ideas so you can go back and look at the reasons you bought in the first place. Again, I highly recommend starting an investment journal or blog because it is a very easy way to keep track of your ideas. If the company is still in sound shape financially and all that is different is that the company’s stock has dropped by 50% what would you do?
Until you can answer this question truthfully to yourself you should not be investing any real money. If you still have confidence in your article/report you wrote and you still think the company is financially sound and will survive the market crash you would either want to do nothing or buy more shares. Patience, proper temperament to remain calm when things are going crazy, remaining unemotional and analytical, and having confidence are especially important when something like this happens and if you do not have enough of these traits you need to work on improving them if you want to become an excellent value investor.
Willingness and Dedication to Continue to Learn and Willpower: I have always loved learning about everything, have constantly sought out knowledge on my own, and have always pushed to constantly improve at every aspect of my life. This is one of the reasons I find investing so intellectually stimulating is because there is always something new to learn, something else to get better at, and always another company or situation to research. If you do not have the willingness and dedication to always learn, get better, and evolve your thought processes you will not grow as an investor. Because value investing is a very solitary activity you will have to push and dedicate yourself to constantly getting better on your own. This can kind of be like working out in some ways because if you truly want to improve yourself you will need to get up and do the work even on days you do not want to.
If you have enjoyed this and other portions of the book I have released thus far please visit this page to buy the book and to see the three reviews, all of which are 5 stars, that the book has received thus far.