It requires a skillful mental balance between the facts of the past and the possibilities of the future. In Good Stocks Cheap Kenneth Jeffrey Marshall, an investor and academic who teaches value investing and asset management at the Stockholm School of Economics and at University of California, shares his personal value investing process.
Although the author covers the basics of value investing it has to be said from the outset that this is not a book for anyone seeking deeper knowledge of finer nuances on the topic. This is a book on process. And mainly the process of selecting stocks to invest in. As such, important topics worthy of entire books in themselves, such as capital allocation, insider dealings, selling positions, moats etc. The benefit of this book instead lies in how explicit it is in penciling out how to actually perform the craft of value investing. Execution matters greatly in the potential success of investing.
The title is an apt description of the content as value investing in this case refers to the currently popular quality-compounding genre, not investing in low valuation multiple, bombed out, deep value stocks. This is a Joel Greenblatt Magic Formula-type of stock selection but with a quality bent.
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The author suggests a sequential process of analytical steps for a stock to pass to qualify as a portfolio holding. Firstly, by looking to a number of angles the investor must be able to say that he truly understands the business of the company.
If not, he should move on to another candidate. Secondly, it must qualify as a good business. In this Marshall looks to the historical financial success of the company, the indications of whether this success will continue into the future and of how shareholder friendly the management is.
After weeding out bad businesses the next needle s to pass is the parallel decision on if this good stock is also cheep judging from the absolute level of a number of valuation multiples and if the investor in the process of analyzing the qualities and inexpensiveness of the stock has been free from biases.
He subsequently presents a short chapter on idea generation that logistically perhaps should have been placed earlier in the book. Further, there is no advice on what to do during the times when no stocks qualify, as all good stocks are expensive. Is cash then the preferred option?
The text is written in an accessible language making it suitable for the novice investor, but is not at all dumbed down due to this. Writers who have taught value investing — such as Ben Graham and Bruce Greenwald — have often had the chance to refine how they explain topics to an audience and this gives great clarity to their texts - so also in this case. This section would have benefited from incorporating a case study to be followed throughout the chapters. Growth and momentum has ruled this investment cycle. Thus, now might be the time to catch the turning tide.
This book shows one way forward. Together with the CFA Institute Belgian financial analyst and consultant Marietta Miemietz delivers a knowledgeable but quite short first introduction into the art of analyzing pharmaceutical companies. This sub page booklet first explores the industry basics in the introduction and a chapter each on the lengthy drug development and on the protection of intellectual property. Then the investment and business topics take over with chapters covering business models, financial analysis and pharmaceutical company valuation.
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Skillful bottom-up investing is hard work. There are several skills and competences needed and knowledge of a number of areas required. There is a vast amount of investment literature but also business literature that can aid an investor in gaining required understanding. One of the required sets of knowledge is the understanding of the industries in which investments are made. Still, there are surprisingly few publications that attempt to give a broad overview over the full set of industries represented by the companies on listed exchanges.
The Art of Value Investing
There are books covering industries but they often focus on the most spectacular ones and often they also push an opinion like anti-Big Oil books or books that argue for or against Big Tech. From what I know Fisher Investments is the only firm that has published a series of books to help investors to understand the full range of sectors from an analytical point of view. The CFA Institute should be well placed to do the same and this book is one in a series of such introductions.
Still, there are so far few books published in the series and it is unclear if there is an ambition to issue a comprehensive set of texts. Most large companies sustain a collection of current commercial products that at some future point in time will be phased out, plus a pipeline of future product candidates that hopefully will take the place of the existing ones. This portfolio approach is however seldom as obviously important as with pharmaceutical companies. The long lead-times in developing a drug, the unpredictable ebb and flow of blockbuster drug sales, the patent cliffs and looming danger of competition from generica and more recently biosimilars make the pharmaceutical industry an unusual place.
Still, these headwinds generally will shift into tailwinds. For the long-term investor it should be a good strategy to buy diversified companies in times of investor pessimism and then wait for the reversal of fortunes. Hence, all else alike a portfolio of 15 companies with 1 drug candidate each will probably yield more success than investing in one company with 15 drug candidates.
The Art of Value Investing. How the World's Best Investors Beat the Market. Wiley Finance
Miemietz has produced a well-crafted text. Even though the booklet is short the novice investor in the pharmaceutical industry will come away better prepared after reading The Pharmaceutical Industry. For a higher-grade rating a more thorough coverage would have been needed — the writing on intellectual property is for example very summary. The text could also have benefited from including more illustrations, partly for enhanced understanding but also to simply make the text less dense.
Books like these are well needed. If the CFA Institute upped their ambition for the texts just a bit this series would fill a void for many investors. For 30 years emerging markets equities have been synonymous with the bald, Yul Brynner-like head of Mark Mobius, the portfolio manager of The Templeton Emerging Markets fund. Over the period Mobius, often called the global nomad for his relentless travelling days a year, managed to return Mobius, now aged 81, has recently announced his retirement from Templeton — but only to launch his own ESG-funds.
Some of the tireless energy remains. The legendary investor John Templeton hired Mobius in Apart from being one of the truly iconic value investors Templeton, less well known, has also sometimes been called the godfather of emerging markets investing. Still, since the author prior to his fund management vocation, had run several companies, he possesses the oversight and perspective of a much more seasoned emerging markets PM. Mobius clearly has emulated Templeton with regards to his investment style.
The focus is on the change in fundamentals on a five-year time frame with a well-defined contrarian stroke as crashes are seen as buying opportunities instead of something negative. Since EM countries often differ substantially when it comes to inflation levels Mobius adjusts for this when looking to valuation multiples. Due to the relative lack of corporate information and the sometimes shaky shape of the corporate governance in many emerging market countries, visiting management is absolutely vital.
On top of the managerial sales pitch Mobius tries to overlay a less emotional view of the environment, history and situation of the company. The ting is, there are 84 rules listed throughout the book and they are of quite different depth and often overlap. If all these rules had been distilled down to perhaps 20 rules they would in my view have been more memorable. There are numerous rules and also case studies throughout the book, sometimes at the expense of more generalized lessons.
The Art of Value Investing - Boole Microcap Fund
Reading this text almost 20 years after publication gives a useful reminder of the end-of-history-sentiment at the time. The liberal democratic market economy was to lift all boats into prosperity. It was at the time obviously hard to forsee how different these regions would develop going forward. Mobius delivers a well-crafted story of fundamental kick-the-tires fund management well worth reading for those that are into EM stocks.
Warren Buffett has four main principles for investing in businesses. They need to be within his circle of competence, run by good management, have good long-term prospects and be available at a fair price. The little book that creates wealth gives the investor some well needed filters for how to think about good long-term prospects.
In order to achieve high returns over the long term the business needs to have some type of competitive advantage or in Buffet terms, moat. However, this is a book for corporate managers. Dorsey wanted to write a book for investors and it doesn't disappoint. Morningstar follows businesses and rank them in terms of the strength of the moat and an ETF has even been created to track these businesses. For a long-term investor that wants to create wealth without having to continuously find new investment opportunities the business then needs to have some kind of moat.
Munger refers to this as "sit on your ass investing" in his usual witty way. Businesses that are undervalued for the short term may give the investor gains but the challenge is that these gains need to be re-invested, causing the need for continuously making good stock picks. It takes time to find good investments, meaning that it's important to benefit from the opportunities that come up. Having a large analyst team makes it possible to analyze a broad set of companies leading to a higher chance of finding continuously good opportunities.
This might be harder for the individual investor. Dorsey divides moats into four categories: intangibles brand, patents, licenses , switching costs, network effects and economies of scale. The moat can either be strong, wide moat , or weak, narrow moat.
It's rather self-explanatory that a business can't be prosperous over the long term without having some kind of advantage against the competitors. A business may have a patent that shuts out the competition for a set period of time or it may have a brand that enables the business to set a price that is above the cost of production. Some businesses have historically had a high degree of customer retention meaning that the switching costs are high. A typical example of a business with high switching costs are banks. An example of a business with high network effects is Facebook where existing users benefit from having more users on the platform.
Interestingly, Dorsey explained during a presentation that it's not always a benefit for a company to have all or many types of moats; a really wide moat in any of the categories may well be better. The book is focused on the US in terms of the majority of businesses examples that is brought up and especially in terms of how to think about taxation which disturbs the flow a bit for a non-US investor.
A topic in the book where value investors often have different opinions is about moat versus management. Dorsey is of the view that moat is more important and uses the quote from Buffett: "When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact". I tend to agree with this as there are so many examples of great managers working in tough industries without being able to create sustainable high returns on capital.
However, I would also like to emphasize that an excellent manager may well create a corporate culture that could work as a moat in certain instances and through this achieve extraordinary results in highly competitive industries. For investors who want to understand the concept of moats this book is a great start. It's short but packed with insights and I have already started to benefit from the book in terms of how I think about barriers to enter an industry. I didn't pick that up the first time I read Porter's Competitive Advantages which is why I have to give a lot of credit to Pat Dorsey for helping me to grasp this important concept better.
Fortunately life is so much more than investing. This is a book that takes the private investor seriously. Not because it is a complex book, on the contrary — but because it trusts him to do the right thing, thinking long term. In a nutshell you are advised to get a steady and regular source of cash flow for example from a job or a business venture you enjoy. Diversify somewhat.