The best investors have a process. Masters of the Market: featuring Alex Green

0.00  Intro

2.14  What did you learn from your career

6.54  Investing is a long game

9.41  The best investors have a process

12.45 Smart money in hedge funds

14.18 Is Wall Street trustworthy

18,13  How to deal with fear

23.30  How to pick stocks

28.39  How to judge management

30.14  How to build a portfolio

34.02  Do dividends matter

37.05  What are we missing

39.13  Option oriented ETFs

41.40  Trends investors are overlooked

48.15  Small Cap Stocks

51.29  Biggest Mistakes

56.14  My Biggest Mistake

57.54  Top 3 Positions

What is investing? My core.

Investing is all about buying a flow of earnings at an acceptable price.

The pace of earnings growth is a second-order issue.

Risk is the possible loss of long-term purchasing power.

Volatility of price is not risk.  It is the ally of the long-term investor.

The market is NOT ALWAYS efficient.  In general it is efficient, but NOT ALWAYS, and this small difference is crucial, enabling us to capitalise on it.

How do you select your stocks: Quality First, then Value.

A great company deserves a higher valuation. It is possible that you paid a slightly higher price than you wanted to pay for the stock, which lowers your overall rate of return, but time is on your side and your long holding time minimizes the impact of the higher purchase price to your overall return. Also, you will always find the opportunity to add to your position at lower valuations, though not necessarily at lower prices.


Deep value investing investors need to be cautious and aware of this approach's inherent problems. Those companies dropping and appearing in the deep-bargain screen probably deserved to be traded by low valuations. Their stock prices were likely low for the right reasons, and buying these would likely have resulted in steep losses.


How do you select your stocks: Quality First, then Value.

There are many gruesome companies in the stock market. These companies operate in very competitive environments and have to be managed well to deliver good returns. In the business world, it is often the economics of the business that eventually triumph over the skills of the managers, however superb their skills maybe.

A company that performed well for 3 years and then lose its good performance subsequently is not a great company, by definition. A great company is one that can perform well, consistently and growing its earnings over 20 to 30 years.

Not uncommonly, these gruesome companies trade at below their net tangible asset prices. This is to be expected, especially if their businesses continue to be gruesome. Their low trading prices attract some investors who are enticed by the very low price relative to their net asset value.

Here is a very important point for any investor. When the price of a company falls, all its valuation ratios become very good. Its price to book value, its price to sales and its price to earnings ratios, all fall and its dividend yield (using last year's dividends) rises.

The uninitiated may think these companies are now undervalued using these financial ratios. Here lies the risk of searching for undervalued stocks in gruesome companies.

The more intelligent investors do not solely rely on these financial ratios alone, they require a lot more analysis. As a general rule, most shares are priced appropriately most of the time. It is only some of the time, when they are mis-priced too low or too high.

The risk in buying great companies is overpaying too much to own it. However, great companies do have earning power for many years, by definition. They continue to grow their intrinsic value over time. If you can acquire these companies at bargain prices (very rarely) or at fair prices (commonly), you should do well in your long term investing. Also, it is alright to pay a little bit more to own these companies as over the long time of holding them, they will still reward you handsomely. As these great companies are few, selling them only make a lot of sense if you can find another of equal quality (very difficult indeed) that offers higher reward to downside risk with high degree of probability. Well, not unexpected, this is not easy.

Buffett says: Buying a wonderful company at a fair price is better than buying a fair company at a wonderful price. He is absolutely right. Stay with quality first, then value; and your investing over the long term should be quite safe and mistakes, if any, will be few.

Growth versus Value: Why invest unless you see value?

Growth companies are those that are growing sales and earnings every year. 

Value companies are trading at low prices. These low prices are usually the result of tough times at the company but occasionally just because the market's a weird place. 

Often, the best growth investments are smaller companies. 

The best value plays are usually large companies. Not always, but most of the time. 




Growth companies: 

The PEs of growth companies tend to fluctuate hugely. When the growth slowed or the companies hit a rough patch, the shares of growth companies can fall by a large amount. 

• Can you spot these companies in the early stages of their growth paths? 

Value companies: 

Large good companies were selling at bargain prices during the recent global financial crisis in 2008/2009. These companies are "safe" to buy during these periods when they are undervalued. They usually will rebound during recovery of the market. Some companies met some headwind or rough patch during their financial year and their share prices were sold down hugely, offering bargain prices for the savvy investors. 

• Did you spot the values in these times in these stocks? 
• Did you seize these opportunities or were you seized by fear of loss and the unknown? 

The division between growth and value companies is not always clear-cut. 

• Many can also be classified as stocks that have business growth selling at reasonable prices (GARP). 
• Another phenomenon to note is that investors tend to invest into value companies when they also starting to show some growth in their business. 
• Similarly, investors buy into growth companies at the point when they are starting to show some value. :-) 

Therefore, growth and value investing are basically two sides of the same coin. They are joined at the hip, according to Buffett. 

Above all else, why invest unless you see value in either?

It is always preferable to invest in compounders and growth companies than just any bargains or cheap non-quality stocks..

Given a choice:

Choose compounders and growth.

They are always better than lousy companies that are available at low prices.

Those who choose these lousy companies at low price may find many of them not so rewarding.

A few though rewarding, but they will soon realise that this strategy gives limited upsides.

Don't just focus on cheapness.

Always look for great quality growing companies to buy at cheap prices.

Seek out the ones that will give you the 10 baggers in 10 years.



What does a 10 bagger investment looks like?

$1000 invested today growing to $10,000 in 10 years.

Initial capital  $1000
1st doubling  $2000  ($1,000 x 2^1)
2nd doubling $4000  ($1,000 x 2^2)
3rd doubling  $8000  ($1,000 x 2^3)
4th doubling  $16,000 ($1,000 x 2^4)

Basically, you aim to double your capital every 3rd year.

Essentially, you need to grow your capital at a rate of 24% annually.  (Rule of 72:   72/3 = 24%)

Terry Smith:  Choose Quality Stocks Over Value Investing (Morningstar)

Good Investing - Buy great companies at reasonable prices and holding them for the long term

Being able to think independently is the best way to invest successfully.

There are two ways to value investing.

1.  Graham type value investing (Classic Value Investing).

One approach involves buying shares in beaten-up companies whose share prices had become depressed and looked cheap.

Occasionally, some investments would pay off, but more often than not they didn't.

These shares can be cheap for a reason; they are shares of bad or mediocre companies.

You are unlikely to get a great tasting wine when you buy a cheap bottle of wine.

2.  Buying growing high quality companies at reasonable prices  (Growth Investing)

The better investing is about investing in great companies buy buying their shares at reasonable prices and holding on to them for a long time.

Great companies generate high levels of profits or cash flows on the money they invest.

The investor's job is to buy the shares of these companies when their share prices offer you an acceptable return on your investment.

Combining quality companies and a reasonable purchase price, and adding in the factor of time, put one well on the way to a successful investing career.


Portfolio Management

You do not need to know everything about a company to be a successful investor.

In fact, too much information can be bad for you.

If you have a company's latest annual report and its current share price you have all the information you need to invest profitably.

From this information, you can work out

• whether the company is good or bad, (Is it a quality business?)
• whether it is safe or dangerous,  (Is it a safe business? ) and 
• whether its shares are cheap or expensive. (Are its shares cheap enough - are they good value?)

The investor armed with annual reports and a thorough approach, can gain an advantage over many analysts.

Doing in-depth analysis for companies you are considering as investments will empower you with knowledge and understanding about a company which less diligent investors will not be aware of.

Investors do not need to own lots of companies.

A portfolio of 10 to 15 companies spread across different industries is sufficient to get good, diversified investment results.

You must be confident in trusting your own judgement whilst ignoring the huge amount of noise and chatter that goes on in the investing world.

Three common approaches employed in the stock market: Value investing, Growth Investing and Technical Investing

There are essentially 3 types of investing employed in the stock market, namely:

1. value investing
2. growth investing
3. technical investing.

Value investing was taught by Benjamin Graham.

Growth investing was shared by Philip Fisher.

Warren Buffett started off as a strict value investor of Benjamin Graham type.  He has since incorporated a lot of Philip Fisher's teaching into his investing.

In effect, Warren Buffett teaches that value and growth investing are essentially different sides of a same coin.  What is investing if not value investing, that is, buying something for less than its intrinsic value?

Value investing and growth investing are most suited for those with a long term investing horizon.

Most successful long term investors are essentially value investors.

They hold long term portfolios that have compounded in values over a long period of investing.

Technical investing are employed mainly by those with short term focus in their investing.  

The majority of traders in the market are technical "investors".




Additional notes:

Fundamental analysis is both qualitative and quantitative.

In fact, in my practice, qualitative is the more important analysis.

The ability to understand the business ensures that you are investing in a great company within your circle of competence.

Some combine the fundamental with the technical, and feel that they have an edge when doing so.

Personally, technical analysis has played little role in my investing so far.

Investor Mistakes (Short-lived Growth)

So called value stocks are stocks that have low price to book ratios, and growth stocks are stocks that have relatively high price to book ratios.

Many studies demonstrate that value stocks outperform growth stocks, perhaps because investors overestimate the odds that a firm that has grown rapidly in the past will continue to do so (Short-lived Growth).

A Wonderful Company to Invest for the Long Term (Screen 1)

Chart of Revenue, PBT and EPS.over 13 years

Revenue = Red line
PBT = Green line
EPS = Blue line

Chart of EPS, High Price and Low Price over the last 13 years
EPS = Brown line
High Price = Blue line
Low Price = Purple line



























ABC

Better Investing

A.  Analyse Growth

Step 1: Historical Sales

Historical sales growth is the first of four indicators BetterInvesting uses to identify well managed growth companies.

It is desirable to invest in companies whose sales growth is strong and consistent and generally growing faster than the overall economy and inflation combined. *

Is the company's historical sales growth rate acceptable for a company its size?
Check growth rate % - have sales grown faster than the competition and the economy?
Check growth rate trend - have sales figures changed direction recently? If sales are up or down do you know why? Are the forces that caused growth in the past the same ones that will create growth in the future?
Does the company deserve further study?

Compare your candidate company to:
Others in the same industry
Peer group average
Industry average

* Review background economic and inflation data
Gross Domestic Product Data
Inflation Data


Step 2: Historical Earnings Per Share

Historical earnings per share (EPS) growth is the second indicator BetterInvesting uses to identify well managed growth companies.

It is desirable to invest in companies whose EPS growth rate is strong and consistent and generally growing faster than the overall economy and inflation combined.

Is the company's historical EPS growth rate acceptable for a company its size?
Check growth rate % - have earnings grown faster than the competition and the economy?
Have EPS figures changed direction recently? If so, do you know why?
Does the company deserve further study?

Compare your candidate company to:
Others in the same industry
Peer group average
Industry average


Step 3: Historical Stock Price Review

You've reviewed the company's historical sales and earnings growth. Both should be growing
1. Faster than the economy and inflation combined
2. Faster than competitors
3. Consistently

If these conditions have been met then check that EPS is growing in line with sales.
1. Check that the graph lines of sales and EPS are mostly straight and moving together in parallel toward the upper right-hand portion of the graph.
2. Compare the growth rates of both sales and EPS using the rates given in the data grid.

Next, determine whether the company's stock price has tracked the growth rates of Sales and EPS. A company's stock price will typically follow the earnings growth rate -- price follows earnings. Looking at the graph you can see the relationship of stock price to EPS.

Steady growth in stock price is an indicator of management's ability to grow sales and EPS and that the market has confidence in the company.

It is desirable to invest in companies whose share price increases as its sales and earnings increase. Price bars show how much movement up and down there is in the stock price each year. Skilled management can control the variables in the company so that the high and low prices travel smoothly upward. More up and down movement means more risk.

Check
Are earnings growing in line with sales?
Has the company's stock price moved in line with EPS?
Does this company deserve further study?


B.  Evaluate Management

Step 1:  % Pre-Tax Profit on Sales

% Pre-tax Profit on Sales is the third indicator BetterInvesting uses to identify well managed growth companies. A good percent pre-tax profit margin shows a company is well managed.

It is desirable to invest in companies whose percent pre-tax profit is increasing or at least staying the same. Examining the most recent five year average helps us determine this.

Is the 5 year average percentage of pre-tax profit on sales increasing or at least staying the same?
Is the percentage of profit consistent over time?
Does this company deserve further study?

Compare your candidate company to

Others in the same industry
Peer group average
Industry average

Step 2:  % Earned on Equity

% Earned on Equity (ROE) is the fourth indicator BetterInvesting uses to identify well managed growth companies. It tells how effectively company management is using the shareholders' money to make a profit.

It is desirable to invest in companies whose ROE percentage is increasing or at least staying the same. An exception is when a company is paying off debt, which is covered in the next section.

Is the percentage of ROE increasing or at least staying the same?
Is the percentage of ROE consistent over time?
Does this company deserve further study?

Compare your candidate company to
Others in the same industry
Peer group average
Industry average


Step 3:  Total Debt

One indicator of management skill is how debt is employed.

Most companies borrow money to help them reach their goals. Companies go into debt to buy equipment, real estate, and many other things. Some industries use debt more than others. Borrowing some money can be very good because it helps the company do things it could not afford to do on an all cash basis. Borrowing too much money can be very bad because it increases risk in two ways:

1. Debt increases the risk to common shareholders because the company must pay the claims from debt and preferred stockholders before common shareholders receive anything.

2. High levels of debt are risky for a company because it has to pay its debt obligations whether it's doing well or not. If the company runs short of money during a recession, the debt obligations could force the company to go out of business.

Check:

Is the total debt increasing or decreasing?
Review the company web site and official reports to understand the reasons for significant changes in total debt.

Look at Total Debt and % Debt to Capital together to understand how the company is managing debt.

Step 4:  % Debt to Capital

One indicator of management skill is how debt is employed. Look at Total Debt and % Debt to Capital together to understand how the company is managing debt.

The percent of total debt to capital helps you understand whether company management is using debt conservatively or liberally. The ratio enables you to make valuable comparisons between the company you are studying, peer companies and the industry.

Some industries such as banks, financial institutions, and utilities typically operate using higher levels of debt. Some successful companies in other industries have proven that they can carry high debt over many years. Younger companies often have relatively higher levels of debt, but because they are young they don't have a track record that shows they can manage it well over many years. This adds considerable risk as an investment.

Check:

Is percent of Debt to Capital increasing or decreasing markedly?
Review the company web site and official documents to understand the reasons for changes in debt levels (company expansion, acquisitions, divestiture, etc.)
Is the company on a "spending spree" financed by debt?
Is the company borrowing enough to help it stay competitive?

Compare to:
Historical trends
Peer Group
Industry averages


C.  Forecast Sales Earnings

Step 1:  Forecast Sales

If the company you are studying has not met any of the BetterInvesting standards you have studied so far, you should discard the company and begin the study of another.

If all preceding indicators have met the BetterInvesting standards then you have more than likely identified a quality growth company. You now need to consider its potential as an investment for your portfolio.

You must predict how well your investment candidate will perform in the future by estimating sales and earnings.

First, forecast the rate at which you believe sales will continue to grow in the future.

Forecast company sales by considering:

1. Historical results -- consistent strong growth
2. Competition
3. Changes in consumer or market preferences
4. Changes in products or services offered

Is your forecast moderate, meaning it does not rely on extreme conditions or situations?
Is your forecast sustainable, meaning it does not rely on events or circumstances that are not likely to occur regularly?
How does it compare to other companies you may have studied?


Step 2:  Forecast Earnings

Forecast the rate you believe earnings will grow in the future. Your forecasted earnings growth rate will establish an estimate of how much money the company will be earning per share five years from now. This EPS forecast will help you establish an estimated high price the EPS would support.



D.  Assess Risk and Reward

Step 1:  Forecast High Price

How high is the price of the stock likely to go in the next five years?

The answer comes by multiplying the highest likely earnings per share by the average high price earnings ratio.

1. The default high EPS forecast is determined by your entries in the preceding screen.

2. The average high PE forecast is determined by reviewing historical data and current PE primarily, and competitive information as well.

Changing the numbers in the boxes changes the forecast.


Step 2:  Forecast Low Price

How low is the price of the stock likely to go in the next five years?

The answer comes by multiplying the lowest likely earnings per share by the likely average low price earnings ratio.

The default values displayed are based on historical averages.

You need to decide whether or not they reflect the company in the next five years and adjust if necessary.

Step 3:  Assess Stock Price

Now that you have estimated the high and low prices for the next five years, find the current price and determine where it falls within the high-low range.

The range between the high and low prices is divided into three zones: sell, hold and buy.

1. If the current price is in the top range, the stock is in the sell range.

2. If the current price is in the middle range, the stock is in the hold range.

3. If the current price is in the lower range, the stock is in the buying range.

Step 4:  Determine Potential Gain vs. Loss

Even though well considered, forecasts are not certain.

By comparing the current price to

1. Your forecast high price and
2. Your forecast low price

you determine your potential gain and potential loss.

It is desirable to invest in companies offering a potential gain at least three times the potential loss.


E.  Determine 5 Year Potential

Determine 5 Year Potential

Compounded Return is the projected annual price appreciation plus the projected average annual yield.

The Price Appreciation is the increase in the price of the stock, assuming you sold the stock at its projected high price.

The Yield is the projected average annual return on the price, paid as a dividend. Yield is calculated by dividing the dividend by the purchase price of the stock.

If the company performs as well as you expect, and you sell the stock at the forecast high price, this will be your financial return.





Better Investing - Core SSG
http://www.betterinvesting.org/public/default.htm

http://www.betterinvesting.org/NR/rdonlyres/CB93E207-7341-4225-B609-8197173DFBB9/0/P1JudgmentandtheSSG4pp.pdf

http://www.betterinvesting.org/Public/SingleTabs/Webinars/archives.htm


Stock Research Form

4.0 CONCLUDING DIALOGUE (STOCK SELECTION REPORT)

To complete, make selections from choices presented in each statement below.

1.       The company is (well-established) (new) and operates (internationally) (nationally) (regionally).

2.       The product line or service is (diversified) (limited) and sold to (consumers) (manufacturers) (other companies) (government(s)).

3.       Business cycles affect sales and earnings (minimally) (moderately) (severely).

4.       Interest rates for T-bills are historically (low) (average) (high) and seem to be (trending upward) (steady) (trending downward).

5.       Current inflation rates are (low) (average) (high) and seem to be (trending upward) (steady) (trending downward).

6.       In its industry the company is the (largest player) (in the top tier) (an average or smaller size company).

7.       The company has a (continuous dividend record for ________ years) (an inconsistent dividend record) (no dividend record).

8.       The business cycle seems to be (trending upward) (steady) (trending downward).

9.       The current stage of the business cycle tends to (help) (not effect) (hurt) the profits of the company which suggests (no concern) (caution) (optimism) for the company under review.

4.1 YOUR PROJECTIONS ON THE SSG (SUMMARY)
	Projection	Rationale
Sales Growth Rate (%)
EPS Growth Rate (%)
High P/E
Low P/E
Low Price
% Payout
4.2 YOUR FINAL RECOMMENDATION (BUY, SELL, HOLD)

When to Sell?

Selling “Myths”
• MYTH – Once a stock has doubled our investment it is time to sell.
• MYTH – Wait until a stock is back to even before selling.
• MYTH – Sell if the stock price falls 10% (or some other %) below the
purchase price.
• MYTH – Only sell when your SSG says “Sell.”
• MYTH – If a company is meeting our growth expectations, then do
not sell.
• MYTH – Don’t sell a stock until you have found a good replacement.
• MYTH – Sell everything when we are going into a bear market.
• MYTH – Don’t sell because it’s a “good company.”

Valid Reasons to Sell
• When something is truly wrong with the
business and it won’t likely be fixed within a
year
• When the stock price has risen so much that
future gains are unlikely.
• When you find a better stock. Frequently this is
a back‐door way of exiting a weak holding.

How can you become a better seller?
•Write it down – have written rules for selling just like you do
when buying
•For an investment club – rotate stock assignments so one person
isn’t identified with “her” or “his” stock
•Remember, stocks are a means to an end. The goal is to grow
your wealth. You aren’t being disloyal to a stock if you sell it.

http://www.betterinvesting.org/NR/rdonlyres/12386A1B-284F-4E75-B02C-D9396B363B26/0/StockUpFeb2015Slides4pp.pdf

Philip Fisher and Walter Schloss

A Dozen Things I’ve Learned from Philip Fisher and Walter Schloss About Investing

1. “I had made what I believe was one of the more valuable decisions of my business life. This was to confine all efforts solely to making major gains in the long-run…. There are two fundamental approaches to  investment.  There’s the approach Ben Graham pioneered, which is to find  something intrinsically so cheap that there is little chance of it having a big  decline. He’s got financial safeguards to that. It isn’t going to go down much,  and sooner or later value will come into it.  Then there is my approach, which is to find  something so good–if you don’t pay too much for it–that it will have very,  very large growth. The advantage is that a bigger percentage of my stocks is apt  to perform in a smaller period of time–although it has taken several years for  some of these to even start, and you’re bound to make some mistakes at it. [But]  when a stock is really unusual, it makes the bulk of its moves in a relatively  short period of time.”  Phil Fisher understood (1) trying to predict the direction  of a market or stock in the short-term is not a game where one can have an advantage versus the house (especially after fees); and (2) his approach was different from Ben Graham.

2. “I don’t want a lot of good investments; I want a few outstanding ones…. I believe that the greatest long-range investment profits are never obtained by investing in marginal companies.”  Warren Buffett once said: “I’m 15%  Fisher and 85% Benjamin Graham.”  Warren Buffett is much more like Fisher in 2013 than the 15% he once specified, but only he knows how much. It was the influence of Charlie Munger which moved Buffet away from a Benjamin Graham approach and their investment in See’s Candy  was an early example in which Berkshire paid up for a “quality” company.  Part of the reason this shift happened is that the sorts of companies that Benjamin Graham liked no longer existed the further way the time period was from the depression.

3. “The wise investor can profit if he can think independently of the crowd and reach the rich answer when the majority of financial opinion is leaning the other way. This matter of training oneself not to go with the crowd but to  be able to zig when the crowd zags, in my opinion, is one of the most important fundamentals of investment success.” The inevitable math is that you can’t beat the crowd if you are the crowd, especially after fees are deducted.

4. “Usually a very long list of securities is not a sign of the brilliant investor, but of one who is unsure of himself. … Investors have been so oversold on diversification that fear of having too many eggs in one basket has caused  them to put far too little into companies they thoroughly know and far too much in others which they know nothing about.” For the “know-something” active investor like Phil Fisher, wide diversification is a form of closet indexing.  A “know-something”  active investor must focus on a relatively small number of stocks if he or she expects to outperform a market.  By contrast, “know-nothing” investors (i.e., muppets) should buy a low fee index fund.

5. “If the job has been correctly done when a common stock is purchased, the time to sell it is almost never.” Phil Fisher preferred a holding period of almost forever (e.g., Fisher bought Motorola in 1955 and held it until 2004). The word “almost” is important since every company is in danger of losing its moat.

6. “Great stocks are extremely hard to find. If they weren’t, then everyone would own them.  The record is crystal clear that fortune – producing growth stocks can be found. However, they cannot be found without hard work and they  cannot be found every day.” Fisher believed that the “fat pitch” investment opportunity is delivered rarely and only to those investors who are willing to patiently work to find them.

7. “Focus on buying these companies when they are out of favor, that is when, either because of general market conditions or because the financial community at the moment has misconceptions of its true worth, the stock is selling  at prices well under what it will be when it’s true merit is better understood.” Like Howard Marks, Fisher believed that (1) business cycles and (2) changes in Mr. Market’s attitude are inevitable.  By focusing on the value of individual stocks (rather than just price) the  investor can best profit from these inevitable swings.

8. “The successful investor is usually an individual who is inherently interested in business problems.” A stock is a part ownership of a business. If you do not understand the business you do not understand that stock.  If you  do not understand the business you are investing in you are a speculator, not an investor.

9. “The stock market is filled with individuals who know the price of everything, but the value of nothing.” Price is what you pay and value is what you get.  By focusing on value Fisher was able to outperform as an investor even  though he did not look for cigar butts.

10. “It is not the profit margins of the past but those of the future that are basically important to the investor.” Too often people believe that the best prediction about the future is that it is an extension of the recent past.

11. “There is a complicating factor that makes the handling of investment mistakes more difficult. This is the ego in each of us. None of us likes to admit to himself that he has been wrong. If we have made a mistake in buying a stock  but can sell the stock at a small profit, we have somehow lost any sense of having been foolish. On the other hand, if we sell at a small loss we are quite unhappy about the whole matter. This reaction, while completely natural and normal, is probably one  of the most dangerous in which we can indulge ourselves in the entire investment process. More money has probably been lost by investors holding a stock they really did not want until they could ‘at least come out even’ than from any other single reason. If  to these actual losses are added the profits that might have been made through the proper reinvestment of these funds if such reinvestment had been made when the mistake was first realized, the cost of self-indulgence becomes truly tremendous.”  Fisher  was very aware of the problems that loss aversion bias can cause.

12. “Conservative investors sleep well.”  If you are having trouble sleeping due to worrying about your portfolio, reducing risk is wise. Life is too short to not sleep well, but also fear can result in mistakes.

Walter Schloss

1. “I think investing is an art, and we tried to be as logical and unemotional as possible. Because we understood that investors are usually affected by the market, we could take advantage of the market by being rational. As [Benjamin]  Graham said, ‘The market is there to serve you, not to guide you!’.”  Walter Schloss was the closest possible match to the investing style of Benjamin Graham.  No one else more closely followed the “cigar butt” style of investing of Benjamin Graham.  In  other words, if being like Benjamin Graham was a game of golf, Walter Schloss was “closest to the pin.”  He was a man of his times and those times included the depression which had a profound impact on him.  While his exact style of investing is not possible  today, today’s investor’s still can learn from Walter Schloss.  It is by combining the best of investors like Phil Fisher and Walter Schloss and matching it to their unique skills and personality that investors will find the best results.  Warren  Buffet once wrote in a letter:  “Walter outperforms managers who work in temples filled with paintings, staff and computers… by rummaging among the cigar butts on the floor of capitalism.”   When Walter’s son told him no such cigar butt companies existed any  longer Walter told his son it was time to close the firm.  The other focus of Walter Schloos was low fees and costs. When it came to keeping overhead and investing expenses low, Walter Schloss was a zealot.

2. “I try to establish the value of the company.  Remember that a share of stock represents a part of a business and is not just a piece of paper. … Price is the most important factor to use in relation to value…. I believe stocks  should be evaluated based on intrinsic worth, NOT on whether they are under or over priced in relationship with each other…. The key to the purchase of an undervalued stock is its price COMPARED to its intrinsic worth.”

3.”I like Ben’s analogy that one should buy stocks the way you buy groceries not the way you buy perfume… keep it simple and try not to use higher mathematics in you analysis.”Keeping emotion out of the picture was a key part of  the Schloss style. Like Ben Graham he as first and foremost rational.

4. “If a stock is cheap, I start buying. I never put a stop loss on my holdings because if I like a stock in the first place, I like it more if it goes down. Somehow I find it difficult to buy a stock that has gone up.” 

5. “I don’t like stress and prefer to avoid it, I never focus too much on market news and economic data. They always worry investors!” Like all great investors in this series, the focus of Schloss was on individual companies not  the macro economy.  Simpler systems are orders of magnitude easier to understand for an investor.

6. “The key to successful investing is to relate value to price today.” Not only did Schloss not try to forecast the macro market, he did not really focus forecasting the future prospects of the company.  This was very different  than the Phil Fisher approach which was focused on future earnings.

7. “I like the idea of owning a number of stocks. Warren Buffet is happy owning a few stocks, and he is right if he is Warren….” Schloss was a value investor who also practiced diversification.  Because of his focus on obscure  companies and the period in which he was investing, Walter was able to avoid closet indexing.

8. “We don’t own stocks that we’d never sell.  I guess we are a kind of store that buys goods for inventory (stocks) and we’d like to sell them at a profit within 4 years if possible.”  This is very different from a Phil Fisher  approach where his favorite holding period is almost forever. Schloss once said in a Colombia Business school talk that he owned “some 60-75 stocks”.

9.  “Remember the word compounding.  For example, if you can make 12% a year and reinvest the money back, you will double your money in 6 years, taxes excluded.  Remember the rule of 72.  Your rate of return into 72 will tell you  the number of years to double your money.” Schloss felt that “compounding could offset [any advantage created by] the fellow who was running around visiting managements.”

10.  “The ability to think clearly in the investment field without the emotions that are attached to it is not an easy undertaking. Fear and greed tend to affect one’s judgment.” Schloss was very self-aware and matched his investment  style to his personality. He said once” We try to do what is comfortable for us.”

11. “Don’t buy on tips or for a quick move.”

12.  “In thinking about how one should invest, it is important to look at you strengths and weaknesses. …I’m not very good at judging people. So I found that it was much better to look at the figures rather than people.” Schloss knew  that Warren Buffett was a better judge of people than he was so Walter’s approach was almost completely quantitative.  Schloss knew to stay within his “circle of competence”.  Schloss said once: “Ben Graham didn’t visit management because he thought figure told  the story.”

http://25iq.com/2013/10/27/a-dozen-things-ive-learned-from-philip-fisher-and-walter-schloss-about-investing/

Growth Investing

The Conventional definition:  An investor who buys high price-earnings ratio stocks or high price to book ratio stocks.


The Generic definition:  An investor who buys growth companies where the value of growth potential is being underestimated.   


In other words, both value and growth investors want to buy undervalued stocks.

The difference is mostly in where they think they can find bargains and what they view as undervalued (value of the growth assets versus the value of the assets per se.)

If you are a growth investor, you believe that your capability edge lies in estimating the value of the growth assets better than others in the market.

Why buy growth?

Why are investors obsessed with growth?  

The answer is straightforward.

More than anything else, growth drives sustainable increases in earnings and cash flow.

And these factors determine a company's real worth and hence, its stock price.



What is growth?

When we talk about growth, we are basically talking about a company selling more goods ands services this year than it did last year, and expecting to sell even more the following year.

Increasing sales aren't the only way for a company to grow the bottom line.

It could, for a while at least, cut expenses and "do more with less."

It could buy back its own stock and decrease the denominator used in the earnings per share calculation (as long as this amount outweighs the loss of interest income from the money used to repurchase the share).

But there is only so much fat to trim, and if a company is going to see its profits - and ultimately its stock price rise over the long term, it must grow the top line.  



Why buy growth?

With the right principles and patience, you can hope to identify companies that are likely to turn a high growth rate - or an anticipated high growth rate - into a sustainable force to drive future cash flow for a long time, thus giving you a huge payoff for your diligence and effort.

Rapid growth can lead to big returns .... or painful mistakes. Be knowledgeable.

Growth is a strategy in which stock pickers may have a better chance of success.

Buying growth with a broad-brushed index approach is a formula for underperformance, but some smart choices can lead to outperformance.


Value companies

A good value investment will rise in price because the market will eventually take notice of it - either because people become more widely aware of its performance or because they recognise that its problems are being corrected.

As the market corrects its earlier impressions, the stock rises, sometimes dramatically.

If it is to continue to rise, however, the company has to do more than show it is worthy of recognition.  It has to perform ... and grow.

Some "value" investments actually have great growth potential, while many will at best turn in tepid growth even if all goes well.


Growth companies

The best growth companies, however, will achieve phenomenal expansion.

And the very best can keep it up for years, letting you grow wealth while deferring taxes.

That kind of long-term, high growth is what creates 20-baggers an even 100-baggers.

A single investment like that can transform your portfolio - your whole financial future, in fact.

And you are unlikely to find such a company without identifying extraordinary growth potential.

These businesses aren't just looking to succeed in an established industry.  They want to shake things up.



Two Catches

1.  Rapid growth usually doesn't last long.

Some companies mange to grow sales at an exponential rate (over 100%) for a year, maybe even several.  But maintaining that pace eventually becomes impossible.

If they are successful, companies naturally mature to a state of slow growth.

They evolve into the kind of large, steady companies that offer steady, but usually not large, returns.

Using a growth strategy means finding companies that can sustain extraordinary growth longer than the market realises and expects, either because you have caught it early in its growth cycle, or because it has such strong structural advantages that it maintains a dominant position in its industry.


2.  The market tries to anticipate the future.

You may have heard about companies being "priced" for future events, including an expectation that future earnings will be a lot better than the ones you see today.

Sometimes predictions are too rosy; sometimes they underestimate what a company can do.

When they are too optimistic, high-priced stocks crash down to earth.

When they are too cautious, an "expensive" stock can keep rising sometimes for years.

We want to find the latter.




Comments:

If you own equal amount of ten stocks and one drops 50%, your portfolio goes down 5%.

If you own equal amount of ten stocks and one goes up 500%, your whole portfolio increases in value by 50%.  From just ONE stock.

You can apply that logic on whatever scale you like - a concentrated portfolio of just a few stocks or a less-volatile portfolio of 100 stocks.

With diligence, patience and the right approach, you will find stocks that go up 500% or more.

Of course, you will also pick some that go down 90%.

But is it not true that value stocks beat growth stocks?  Yes, they do  ... broadly speaking.  Unless, that is, you pick the right growth companies.

These rapid growth companies are a part of your broader approach to wealth creation.

Growing versus Non-growing company. Value Investing versus Growth Investing.

A growing company versus a non-growing company


Given the choice, you should choose to invest in a company that is growing its revenues, earnings, and free cash flows over time.  This company continues to grow its intrinsic value and over time, you will be well rewarded for investing in it.


Is investing into growing companies the same as growth investing?

Let us illustrate using company Y.  Company Y is a company that is growing its revenues, and earnings 15% per year, consistently and predictably for the last 10 years.   

At certain times, Company Y is available at a P/E of 10.  Buying Company Y at this stage is a bargain.  It is available at a bargain price.  This is value investing.  If you use PEG ratio of Peter Lynch, it is available at a PEG ratio of 10/15 which is < 1.   

At other times, Company Y is available at a P/E of 20.  Buying Company Y at this stage is not value investing.  Those who buy at this P/E may feel they are also buying a bargain, as they projected that the earnings of Company Y is going to be great and the growth in earnings higher than the 15% per annum in the past.  Maybe they projected that the earnings will be growing  30% per year.   This is growth investing.  If you use PEG ratio of Peter Lynch, it is still available at a PEG ratio of < 1 (= 20/30).

Thus, is there a difference between value investing and growth investing, from a bargain perspective?   There appear to be 2 sides of the same coin.  Those buying into the stock using these strategies are of the opinion they are buying a bargain.   

However, there are differences too.   Historically, value investing has outperformed growth investing when assessed over a long time frame of investing.  But beware of such analysis.   Among the value investing stocks selection, many of the companies did not perform as expected and the fundamentals tanked.   Likewise, those stocks in growth investing, projected to grow at high rate and bought at high P/E, failed to deliver the growth and did not perform as expected.  

Let us learn from Buffett.  Stays with the company that you understand.  This company must have business with durable competitive advantage.  Its management must have unquestionable integrity.  Finally, buy them at a fair price.  

Yes, search out for the growing companies.  I too love such companies.   Above all, emphasizes the quality of the growth of business and its management.   Finally, look at the price (valuation).   Whether it is value or growth investing, buy growing companies at reasonable price (GARP). 

Growth Investing versus Value Investing

Fisher stood out as one of the first money managers to focus on qualitative factors instead of quantitative ones.  He examined factors that were difficult to measure through ratios and other mathematical formulations:  the quality of management, the potential for future long term sales growth, and the firm's competitive edge.

Although Fisher focused on the qualitative characteristics of a company, he was first and foremost a growth stock investor.  He felt the greatest investment returns did not come from the purchase of stocks that were undervalued, since a stock that is undervalued by as much as 50% would only double in price to reach fair market value.

Instead, he sought much higher returns from those companies that could achieve growth in sales and profits greater than the overall market over a long period of time.

Furthermore, Fisher did not seek companies showing promise of short-term growth due to cyclical events or one-time factors.  He felt that the timing was too risky and the promised returns too small.  

Fisher penned his investment philosophy in his book: "Common Stocks and Uncommon Profits and Other Writings" by Philip A. Fisher.

What's Investing Style?

Understand Investment Styles and Determine Which Fit Your Portfolio.

By Melissa Phipps

Successful investors and investments don't just pick companies on a whim. They narrow their focus on investment styles. They may target companies of a certain size, look at company fundamentals as a predictor of long-term value or annual growth, manage every stock move or set the investing on auto-pilot. Most mutual funds or ETFs have a pre-determined style that does not (or should not, sometimes funds get tricky) vary. Often, these investments target a combination of styles. So how do you make sense of it all? Learn the types of investment styles, and it can help you determine which investments best suit your style.

1. Investing by company size: Large Cap, Mid Cap, Small Cap

Companies perform in different ways at various times in their growth cycles. Investors focus on capturing companies at different points—when they are just starting, just starting to grow, in mid-growth, or well established. You can do this by focusing on market capitalization, or the number of outstanding shares multiplied by share price. Large capitalization or big cap companies are those worth more than $10 billion. Mid-caps or mid capitalization companies are about $2 billion to $10 billion. Small-caps or small capitalization companies, between $100 million and $2 billion. There are micro-caps below that, then nano caps, then... I guess angel investments. Fund managers typically choose a market capitalization to focus on. For example, "This fund seeks to generate capital appreciation by investing in small cap companies" or, more specifically, "This Fund seeks capital appreciation principally through the investment in common stock of companies with operating revenues of $250 million or less at the time of initial investment."

So what's the difference? Typically, small-cap companies offer more growth potential. If you get in at the right time (think early Microsoft, 1990s Apple), you can get a great investment return. But small-caps can be riskier than established large-caps. Only the strongest small companies survive. The risks increase as companies get smaller. Micro-, nano- and other tiny-capitalization investments could have serious potential, but unless you are a very agressive investor and can afford the loss, they shouldn't represent a huge part of your portfolio.

Large-cap companies move the market. They are the dominant players, produce consist returns over time, and may even return dividends to investors. They are also liquid companies, meaning it's easy to buy and sell their shares. There typically offer decent returns with less risk, and since they represent the larger market these companies should play a dominant role in your portfolio.

In between are mid-caps, which some investors think is a sweet spot where you can find companies with growth potential that act like value plays (more on growth vs value below).

Different-sized companies seem to perform differently, meaning when large caps are down, small move up. These are assets that are non-correlated, they don't move in the same way. Owning companies of each size helps to balance some of the risk of your portfolio.

2. Investing in company fundamentals: Growth Investing and Value Investing

Some investors use analysis of fundamentals to determine where a company is headed. Growth investors look for companies they think will increase earnings at least 15% to 25% a year on average, based on management, new products, competition, etc. Value investors look for companies that are selling cheap compared to intrinsic value or the value of tangible assets.

For many investors, the real win is a combination of growth and value. A good company with solid long-term prospects at a reasonable price. That's super investor Warren Buffett's way (he doesn't believe in the two separate strategies).

3. Investing with or without a manager: Active vs Passive

An actively managed fund is one with a manager or team of managers picking stocks in an attempt to beat the market. A passively managed fund, also known as an index fund, follows a set group of stocks to achieve its stated goals. Index funds perform like the index they follow, and because there is no one to pay the expenses are typically cheaper than actively managed funds.

Active managers can try to reduce risk when the markets are turbulent, but managers rarely beat the markets by enough to justify the extra expense of an actively managed fund. A recent study found that only 24% of actively managed funds beat their passive counterparts.

4. Investing in a market segment: Sector Investing

Some investors narrow their style to invest in a specific industry or sector, say technology, consumer goods or manufacturing. Sector funds are not diversified in and of themselves, but they can help balance out a portfolio that is heavily weighted in a certain sector because it contains a lot of company stock, for example.

A balanced portfolio can contain a combination of the fund styles mentioned above. It really depends on your personal tolerance for risk, your goals, and the types of investments available to you through your 401(k) or individual retirement account. You can use an asset allocation calculator (this one from Bankrate) to figure out what's right for you. (Some people are just as well off putting everything in an index fund, which is just a cheap way to own the entire market, or a target retirement fund, which does the asset allocation for you.) Choose based on what works for your own investment style.

http://retireplan.about.com/od/investingforretirement/tp/What-Is-Investing-Style.htm