Excerpt From How To Value Invest: My Investment Philosophy
“Nothing in the world can take the place of Persistence. Talent will not; nothing is more common than unsuccessful men with talent. Genius will not; unrewarded genius is almost a proverb. Education will not; the world is full of educated derelicts. Persistence and determination alone are omnipotent. The slogan ‘Press On’ has solved and always will solve the problems of the human race.” Calvin Coolidge
Throughout the rest of the book you will be seeing my actual analysis and evaluation articles where that will show you the valuations and analysis that I have done on real world companies. You will be shown how to value companies using various valuation techniques and how to adjust the numbers for yourself, and what those numbers and valuations mean for the overall investment thesis. You will also be shown my reasoning’s and thought processes for why I decided what I did and why the particular company was a buy or sell decision for me at that particular point. Before we get to that though I need to state my investing philosophy so that everyone knows what frame of mind I am approaching the analysis with.
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I look for companies that have some combination of the following criteria: Some kind of long-term sustainable competitive advantage, or moat as it is also called, companies that produce and sell products in niche markets, companies that I find to be substantially undervalued, have very good management, high insider ownership, are fantastically profitable, have a lot of cash and/or hidden assets, etc.
I only take into consideration in the valuations and analysis what I can see now, and pay almost no attention to rumoured future possibilities or estimates of revenues and margins into the future. The only time future possibilities play even a small role in my articles are in situations where there is a clear catalyst: Activist/value investing firm or individual involved, the company is undergoing a strategic review and is owned and controlled by a few people as in the case with Dole (DOLE) that you will see later in the book, or the company’s management is trying to figure out ways to unlock the companies undervaluation by asset sales or spin offs as in the situation with Vivendi (VIVHY.PK) that you will see later in the book. Even with the above mentioned companies I only valued and analyzed the company as it stood then, and treated future potential as icing on the cake that played almost a zero role in the evaluations.
My number one rule when I buy into a company is preserving capital and making sure that I do not lose money. The fewer losses I have, the more money that is kept and is able to compound faster when I do find winners so I am a very strict, disciplined, and conservative value investor. I generally only buy into companies that are selling at a substantial discount, or margin of safety, to my estimate of value for the company so that this way if I do make a mistake in the analysis or valuations then I will still have a chance to make some money. I usually look for a catalyst that could help unlock the undervaluation of a company such as: Potential for spin-off or asset sale, land or buildings that are not being used that could be sold, activist funds/investment firms that own stock in the company and could push for changes to be made, etc. I try to find areas of the market where a lot of investors do not or cannot invest and I generally only research companies that have market caps of less than $100 million or special situations like spin offs. Now that I am more confident in my abilities to value and evaluate companies I do not hesitate to put 20+ percent of my portfolio into one or more companies. The fewer companies I own the better I know each company. I am also a very contrarian investor and try to find companies that are either unknown, unloved, or are having problems for potential investments as well. The less competition there is the better when looking for investments so I try to steer clear of the herd who generally concentrate on bigger companies. I do not forecast numbers years or even months in advance at all and only value and analyze what I see in the company now so you will not see any DCF valuations in this book. There are a lot of books out there that explain how to do DCF valuations and I would highly recommend Aswath Damodaran’s free online course on valuation where he teaches how to do DCF valuations if you are interested in those kinds of valuation techniques.
I generally plan to hold the companies I buy for years, decades, or hopefully forever if it turns out to be an exceptionally good company and generally only plan to sell if the companies if their share price rises to the high-end of my valuation range quickly or far above what I think its intrinsic value is after I have bought into it, or if I can find another company that I think is a better investment.
Having stated all of this you now have a frame-work for my thought process going forward and how I manage my personal portfolio and the other portfolios that I manage. If you come across any terms that you do not know refer to investopedia.com as it is the best site I have found that explains investing terms and it is still a site I use to this day when coming across things I do not know or understand. If you do not find a definition that you find satisfactory or just want to study something further you should search for the term, person, book, etc on my blog or through Google.
I would also like to mention that I have received no formal training in evaluating companies and some of the ratios that will be talked about throughout the book I came up with on my own and have never seen used anywhere else such as the total obligations, commitments, and debt/EBIT ratio which will be talked about later. I am sure that some professional investors and college professors out there will say that I am technically probably not doing some of the things in this book properly or “How they should be done” but since I had to learn on my own, I have learned to do things that make sense to me, help me to understand the inner workings of a company, and help me to make an informed decision about whether or not a company is a good investment. In my opinion understanding these things in your own particular way, which makes sense to you, is more important than doing things just because someone else says they are proper. If something in this book doesn’t make sense to you, don’t use it, find your own way to make sense of things, and come back to it later. This book is meant to be a practical guide of learning how to evaluate and decide if a company is a good investment without having to spend potentially hundreds of thousands of dollars on a college degree. Use what makes sense to you, skip the rest, and come back to it later when it does make sense to you and you want to learn how to use it.