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The business of value investing – Six essential elements to buying companies like Warren Buffett- Charlie Tian 2009
https://bbs.pinggu.org/thread-695143-1-1.html(Page 45-53)
The business side of investing and three buckets: undervalued, overvalued and fairly valued
阅读到的有价值的内容段落摘录
Ben Graham did was take stock market participation and suggest that it too could be approached in a logical scientific-like manner. Before Graham’s value-oriented approach took hold, the stock market was viewed as a speculative arena for the wealthy. The idea of buying a share of stock based on the business’s future earnings potential, asset values, or balance sheet strength was virtually unheard of. Instead, speculators were buying shares of businesses hoping for the next great oil field or gold mine discovery. Investors did not understand or even consider the concept of looking for cheap businesses that had high margins of safety. Graham provided an almost scientific formula characterized by intense analytical effort toward approaching stocks. The underlying premise was that a stock represents a piece of a business, and the investment approach should be rooted on that concept.
Notice the three underlying characteristics of an investment operation: thorough analysis, safety of principal, and a satisfactory return. An investment must encompass all three. Interestingly, the order of the three conditions is very important. Obviously, you first must analyze the business and figure out what it is you are buying. You can achieve this goal only through deep, rigorous analysis. Then, before you should consider how much money you stand to make, you first should rule out any possibility of a substantial loss in capital. One of the cornerstones of value investing is understanding that capital preservation comes first; only afterward should you think about capital appreciation. You see this devotion toward capital preservation in various sayings by many of today’s most successful value investors: “Preserve the downside and let the upside take care of itself” or “Heads I win, tails I lose little.” No matter how you word it, the idea is the same: Preserving your capital ensures a very high degree of long - term investment success.
Warren Buffett realized this significance when, in 1961, he wrote to his limited partners: “I would consider a year in which we decline 15% and the [Dow Jones] Average 30%, to be much superior to a year when both we and the Average advanced 20%.” Graham’s teachings relied more on the quantitative attributes of a business than on the qualitative factors. He focused on analysing the balance sheet, income statement, and statement of cash flows to get an idea of the quality of the business and of whether it was worthy of investment. Today, this approach is commonly referred to as fundamental analysis — aptly named, because it ’ s the fundamentals of the business that count the most. Without understanding the numbers, you cannot understand the business, no matter how well you think you know it. You wouldn’t purchase a home without first knowing your mortgage payments, taxes, anticipated utilities, and general cost of upkeep; similarly, never invest in a business without understanding its financial framework.
Although Graham focused his investment activities primarily on quantitative aspects, qualitative attributes sometimes can be very valuable when supplemented by a sound quantitative foundation. Brand recognition is the most obvious of qualitative considerations. The Coca - Cola Company has the most recognized brand in the world; that recognition is extremely valuable. The Coke brand allows the company to operate and compete anywhere in the world. Coke has spent decades and hundreds of millions of dollars in marketing and advertising to make its name the most dominant in the soft-drink industry. When is the last time you heard of an entrepreneurs looking to start a soft - drink company? Even with $ 1 billion, it would be virtually impossible for even the cleverest of entrepreneurs to dent Coca-Cola’s worldwide dominance. The brand is a very valuable quality, and it has created billions of dollars in value for Coke shareholders over the years. What can explain the long - term success of a value - based approach, since luck obviously can’t be the reason for so many different investors who follow the same intellectual philosophy? Piggybacking isn’t one of them, as many value investors hold strikingly different portfolios. In his essay, Buffett compared the results of several Ben Graham–schooled investors. While all of them had market - beating track records, their portfolios were not strikingly similar to one another. In fact, Walter Schloss, who, like Buffett, was an original student of Graham, was widely diversified, unlike many value investors who prefer a higher degree of concentration. During the 28 years that Schloss ran WJS Partners investment partnership (1956 – 1984), he typically held over 100 securities. Yet his annual compounded rate came in at 16.1 percent versus 8.4 percent for the S & P. And Schloss never went to college. Schloss did, however, focus on the cold hard numbers of the business and could calculate if a business was selling at a market price that was significantly below its value to a private buyer. He didn’t worry whether he was buying the business in January, December, or any other month that pundits claim is better for equity performance.
阅读到的有价值信息的自我思考点评感想
Value investors are seeking discrepancies between business value and the stock price of those businesses in the market and seeking for arbitrage opportunities. How do we determine whether a business is cheap and an attractive investment? Although investing is part art and part science, thanks to the foundation laid out by Ben Graham and expanded on by Warren Buffett and others, determining the value of a stock is a fairly straightforward concept. Ironically, most investors stumble because they make the process more difficult than it needs to be. Let’s be clear: Successful investing requires intense analytical effort. Nonetheless, if you can understand that what really matters in determining the value of a business is usually a few data points, you are less likely to make an expensive mistake.
In looking for undervalued securities, you should focus on price only to the extent that it provides you with information to determine whether the quoted stock price is less than the value of the business. Merely looking at the stock price doesn’t do much; you have to determine what you are getting for the current price being quoted. For example, how much in earnings does the business generate in relation to the current market price of the company? How much cash is being generated each year? Has the book value of the company been rising or sitting still? Above all, is this a good strong business with future growth opportunity ahead? Let’s keep the focus on how to determine whether a business is undervalued or not.
In the short run, stock prices do not have to behave rationally. Don’t allow short - term market gyrations to cloud your judgment about the quality of the business. While the majority of professional money managers fail to outperform the broad market, numerous investors deliver consistent market – beating returns. A common thread is the business-like orientation of their investment selections. Remember to view stocks as little pieces of a whole business. Your goal is to determine whether that business is undervalued, fairly valued, or overvalued. The value of most businesses usually is based on several key variables; any other information is typically noise and doesn’t add significant value.
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