The everyday investor Phil Town published a sequel to Rule #1 for how normal average folks can invest in the stock market and stand to make a reasonable return, 15% per year. In a difficult endeavor like investing, developing a deeper and more diverse perspective, in order to master both the art and science of it, can yield unimaginable gains over time.
Payback time: price is what you pay, value is what you get. If you buy something where the value is higher than its price, that is very low risk and a very high reward investment
-stockpiling good businesses and continuing to do so as the price goes down
-schools don’t teach ethics. Those who get significant education are actually look not for prestige, getting ahead, climbing the ladder, and not about changing the world as an entrepreneur
-A perfect business contains all of the following qualities:
#1 – Simple, like a lemonade stand
#2 – Protected by some form of monopoly, moat or competitive advantage(s): durable or natural monopoly/oligopoly, lowest cost to make, lowest cost to sell (low marketing, like Tesla cars because of how good they are), huge profit margins (pricing power), can raise prices with inflation, brand, secret recipe, patents, toll (only provider), switching costs, network effect
#3 – Has universal appeal
#4 – Is habit forming – changes how people behave, think, do daily life (Apple iPhone, Airbnb, electric cars, cloud, computer, natural gas for heating homes and electricity)
#5 – Makes the world a better place
#6 – Is run by management that is owner-oriented, passionate, honest, dedicated. Not passionate about the money but the activity itself, otherwise they will be looking to exit within 6 months. This would rule out surgutneftegas as they don’t answer questions about treasury bonds randomly disappearing
3,4,5 are more nice to have, 1,2,6 are must haves
-On yahoo you can find the top performers of each industry and also segregate by industry. Stats like ROE, price cashflow, long term debt vs equity
-in addition to 10k, try also reading the conference call scripts or listen to those calls for valuable information, as analysts ask good questions about the company
-you know you’ve read enough when you aren’t getting new information or if everything seems old. When things repeat, you are there
-if you do things others won’t do, you’ll get things others don’t
-avoid CEOs that: pay themselves too much, setup a golden parachute, abuse company assets, randomly buy businesses that decrease ROIC
-look for: service-oriented, not ego-oriented CEOs, passion, honor, big audacious goals
-Red flags: no understanding of the industry, no real moat, failing to keep up with the times, lack of due diligence
-creative destruction should be embraced, not prevented. E.g. if minimum wage and labor unions get destroyed, that’s a good thing. Votes to protect prices or wages against future wellbeing of a country is a step backward. E.g. tariffs
Chapter 4 – Payback time means “no fear”
-Robert Shiller, author of irrational exuberance, research shows buying companies with low P/E leads to high returns, and buying companies with high P/E tends to lead to low returns
-Price is not the same as value
-The value of a business is more dependent on its future earnings than what it currently holds in cash, equity, or assets
-In recession, stockpile. Normally, since not under intrinsic value by a lot, trade, as that reduces cost and takes advantage of temporary up and downs.
-A perfect business is not on sale often, if at all, as everyone knows it. Waiting for Ms. perfect will have you waiting forever. Buy a business with mostly gold traits and high uncertainty
-return on equity does not consider debt. Buffett bought BNSF 20% stake in 2008 with an ROIC of only 5% five year average, because he believed the companies long term investments would increase ROIC. If a company will have good ROIC based on investments that will make sense, and has a good ROE, say 20%, then that’s fine too. More uncertainty for sure. Over more years, BNSF was growing book value, and, though revenue and net income flat, last few years those were growing substantially.
-As small investors we can wait to be patient for bigger discounts. I would need at least 20% off of intrinsic value to start buying, else risk loss.
-When the big guys have gotten out, that’s when we get in
-Ben Graham, in security analysis: “I am no longer an advocate of elaborate techniques of security analysis in order to find superior value opportunities”
-Private businesses have a higher requirement for payback than stocks as less liquidity
-Do not invest in people looking to climb the ladder or political climbers at the helm. Do not look for self-promoting grandstanders who love politics
-Watch out for companies with unions or technology; tech is risky because if someone else builds a new tech, that company is done. You’d have to stay up to date on tech, or buy the one up to date
-Good companies run by good CEOs and CFOs will institute buybacks whenever the stock price goes down. In case of companies like Microsoft, it’s unlikely they go anywhere near 50% off intrinsic value, especially with the amount of coverage on these companies
-take note of the trend lines, as well as floors and ceilings. FAC- floors and ceilings. Buy at floors or when floors have been penetrated.
Floors and ceilings are entirely psychological, and don’t have anything to do with fundamentals. E.g. $200 for Facebook. Ways to understand the psychology of floors and ceilings:
1; the more a stock price bounces from a certain price, more likely it is a floor or ceiling
2; distance between last support and ceiling
3; price move of over 3% of a ceiling or floor, and 50% or more higher average daily volume will lead to either massive selling or buying (the massive green or red bars may start a trend in that direction)
-platform based companies that create an ecosystem and engage in creative destruction of other processes are the next companies to invest in
-the majority of funds all carry all the well known names so they are generally at or near intrinsic value. As Warren Buffett once said, the great moves are met with yawns or disgust
Disclaimer
This is not Financial Advice. This article is meant only for educational and perhaps entertainment purposes.