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Invest Like a Guru – How to generate higher returns at reduced risk with value investing 2017(Charlie Tian)
https://bbs.pinggu.org/thread-6755810-1-1.html (Page 102-114)
Buy Good Companies: The Checklist
阅读到的有价值的内容段落摘录
Every investor should create his or her own investing checklist, no matter how he or she chooses to invest. As discussed extensively in his bestselling book, The Checklist Manifesto: How to Get Things Right,1 Atul Gawande wrote that checklists have been widely used in the medical and aviation industries because they simplify complex procedures and help doctors and pilots maintain their composure and discipline. When US Airways Flight 1549 from LaGuardia Airport to Charlotte hit a large flock of birds and lost both of its engines, the first thing pilot Sully Sullenberger and his crew did was get out their checklists, according to Sullenberger’s memoir, Highest Duty: My Search for What Really Matters.2 Humans being human, mistakes will inevitably occur. Checklist usage catches the errors, sets discipline and process, and helps avoid potential losses. Hedge fund manager Mohnish Pabrai likens buying a stock to the takeoff of an airplane. Many successful investors have their own checklists to guide their investment processes, although they might not explicitly call them such. For example, Walter Schloss, the notable disciple of Benjamin Graham, averaged 15.3 percent compound return over the course of four and a half decades, versus 10 percent for the S&P 500, and followed his own 16 rules of investing, which cover valuation, discipline, conviction, and leverage.3 Philip Fisher, the father of growth investing, always asks himself 15 questions about the company he is interested in buying. He detailed these 15 questions in his book, Common Stocks and Uncommon Profits, and they cover the areas of market potential, management, the effectiveness of research and development, profit margin, labor relations, and share buybacks. Peter Lynch has a long list of questions he asks about each company, which can be different depending on the specific company situation.
Summarized the questions are:
1. Do I understand the business?
2. What is the economic moat that protects the company so it can sell the same or a similar product five or ten years from today?
3. Is this a fast-changing industry?
4. Does the company have a diversified customer base?
5. Is this an asset-light business?
6. Is it a cyclical business?
7. Does the company still have room to grow?
8. Has the company been consistently profitable over the past
ten years, through good times and bad?
9. Does the company have a stable double-digit operating
margin?
10. Does the company have a higher margin than competitors?
11. Does the company have a return on investment capital of
15 percent or higher over the past decade?
12. Has the company been consistently growing its revenue and
earnings at double digits?
13. Does the company have a strong balance sheet?
14. Do company executives own decent shares of stock of the company?
15. How are the executives paid compared with other similarly sized companies?
16. Are insiders buying?
17. Is the stock valuation reasonable as measured by intrinsic value, or P/E ratio?
18. How is the current valuation relative to historical range?
19. How did the company’s stock price fare during the previous recessions?
20. How much confidence do I have in my research?
Moreover, GuruFocus developed a feature called Warning Signs, which undertakes a thorough inspection on the financial health and performance of companies. These warning signs are highlighted for each company. The purpose of Warning Signs is to advise you of red flags in certain areas of the company that you may have overlooked. These warning signs do not necessarily mean you should avoid buying the stock, but you should be aware of and accept them before you invest.
The Warning Signs checkup covers these areas:
1. Profitability rank
2. Revenue, earnings growth rate of ten-year, five-year, three-year, and
one-year periods
3. Operating losses/Gross margin growth, operating margin growth
4. Asset growth faster than revenue growth
5. Days sales outstanding/Days sales of inventory
6. Owner earnings diverged from reported earnings
7. Divergence between net income and free cash flow
8. Cost of capital higher than the return on invested capital
9. Issuance of new shares
10. Altman Z-Score/Piotroski F-Score
11. Beneish M-Score/Sloan ratio
12. Interest coverage, Dividend payout ratio
13. Short percentage of float
14. Valuation ratios P/E, P/B, P/S relative to historical range
15. Higher forward P/E
16. Buyback track records
阅读到的有价值信息的自我思考点评感想
Not all share buybacks are created equal, as pointed out by Buffett. Share buyback is valuable only if the company buys back its shares at below the intrinsic value of the stocks. If a company buys back at above the stock’s intrinsic value, it destroys value for the remaining shareholders over the long term. This is why Buffett set a threshold for the share buyback at Berkshire Hathaway, which is 1.2 times the book value of the shares. Mutual would have been in a much better position had it kept the cash on its balance sheet. Sears spent close to $5 billion buying back shares from 2006 to 2013. Now it has to borrow money to support its continuing struggle. Its market cap is less than one-fifth of what it spent on buybacks. The buyback benefited only those who sold out at the time. The remaining shareholders were left holding the bag.
If a company is raising dividends, it means that the company is confident in its profitability. It is a positive sign. But as with share buybacks, paying dividends weakens the balance sheet of the company. Investors need to think about its effect over the long term. Paying down debt is always good for a company to do, although it may reduce return on equity as the company is now less leveraged. The only reason insiders are buying their own company’s shares is because they think they will go up, as Lynch pointed out. Academic studies also found that insiders are mostly long-term value investors. They buy their own company stocks when they think their companies are favorable as long-term investments.
The checklist is a useful tool for investors to discipline their stock picking. The warning signs and positive signs can help investors gain a deeper understanding of the company and build the confidence necessary to direct their future actions. Lynch once suggested that investors write a note for every stock they research and buy, then compare the company’s business performance with these notes over time to see if the original investment thesis still holds.14 The checklist, warning signs, and positive signs explained in this chapter should also be included in the research notes. With all these procedures, we hope to reduce errors and failures and avoid the value traps that ensnare many value investors.
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