This article comes from Ryan Maxwell of FirstRate Data. During economic booms, weak companies are often able to flatter their financial performance by manipulating (or managing) their earnings. Strong financial markets allow such companies to repeatedly tap debt and equity funding sources and deploy the funds to create the illusion of current profits instead of… [Read More]
Best Value Investing Blogs, Tips and Articles
Value investing is an investment strategy popularized by Ben Graham and has proved to be a superior investment strategy over long investment horizons. We all like to buy products and services on sale - value investing just extends the concept to buying and selling stocks. It tends to simplify the investment process by eliminating confusing and generally useless concepts often part of the advanced financial and management academic programs. The success as a value investor arises from understanding the business and also by staying disciplined. Therefore, value investing is as much a financial concept as it is a change in investor behavior.
As many enterprising value investors realize after many years of "value investing" in practice, just learning the concepts and methods does not make you into a successful value investors. If this was enough, you would see a large number of very successful value investor mutual fund managers with enviable long term track record. Sadly, it is not so.
In addition to learning the methods and tools of value investing, you have to acquire a certain behavioral attributes that define a value investor. A sincere appreciation of value, a healthy rejection of whatever market sets as the price as a true reflection of value or a given asset, and the guts to stay with own analysis and research for a long period of time DESPITE an uncooperative market.
In fact, the markets are normally against you for most of the time you are invested in any undervalued asset. This created a great opportunity to acquire the asset for cheap, and you did. Wouldn't it be great if once you buy something, the market quickly moves to realized the value for you? Unfortunately, this is not how it works in reality, so you need to be able to call upon a set of behaviors and beliefs to be able to wait patiently for your profits.
At Value Stock Guide, I believe that there is enough material out there that teaches you how to calculate a certain ratio, or create a discounted cash flow model. This is not the secret to investing successfully for long periods of time. The secret to investing successfully for long periods of time is how you act and react at the edges. Do you display conviction in your ideas when the stock goes against you, or do you fold meekly? How do you build up this conviction? Isn't taking the easy way out like everyone else more comforting? Why do you invest - is it because you like the thrill of buying and selling, or is it because you patiently want to see your portfolio grow? Can you sit and watch the paint dry for days, if you know that at the end of the week there will be a substantial reward waiting for you?
I tackle many behavioral and soft side of value investing on these pages. Sometimes I also talk about the concepts. No one has ever become a good investor without building their core base of correct foundational investing attributes. You can do this here.
The articles below explain the concept of value investing, tips and tricks including articles aimed at beginner and advanced investors. Many of the concepts presented here are result of the evolution of value investing practice over time. Original value investing research and strategies are also posted here.
At some point you will wish to start using some of these ideas in your investing. We can help you find the best stocks to buy now and create a well optimized and high performance portfolio.
View articles in other categories: Dividend Stocks, Large Cap Stocks, Mid Cap Stocks, small cap stocks, Macro-economic, Investing Questions, Business, Personal Finance, Investment Guide, Investment Definitions
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The Covid-19 pandemic has rocked the world in 2020. The key financial markets have suffered substantial losses. Is this the beginning of a 21st century great depression… or a major opportunity to buy great stocks at low valuations? The investing world has been speculating ever since the 2008 credit crisis and the global recession that… [Read More]
I posted this video on Youtube yesterday about the Graham Checklist. I go through the checklist, point by point and describe the criteria Ben Graham laid out in his checklist. If you are a subscriber to Value Stock Guide, you very likely already have a copy of this checklist. If not, feel free to download… [Read More]
For many, the art of value investing may seem to be decidedly “kludgy”. Strict value investors refuse to consider the future prospects of the company. Estimates are inherently risky. We do not have a fool proof way of making estimates, and future has a way of not sticking to our expectations. So we dispense with… [Read More]
As a value investor, you have no doubt come across many of the key financial ratios, such as Price/Earnings Ratio or Price/Book Ratio. You may have also got used to evaluating businesses based on their operational metrics or profitability ratios. These are all very important, and as long as you review these regularly and understand… [Read More]
When the markets are overvalued, such as now, we value investors tend to stay on the sidelines. First, there are not many good deals to be found, and second, the cash we have is worth more when the market crashes. Still, the stock market is not the only place to invest money. Perhaps there are… [Read More]
Ben Graham gave us many of the core concepts of value investing. He also gave us a few shortcuts. Graham Number is one of the shortcuts an investor can take to estimate the intrinsic value of a stock. What is the Graham Number? Most value investors know to look at the two primary ratios for… [Read More]
Let’s imagine an asset that you are considering acquiring. You know that there is a high likelihood that the price of the asset will be lower in the near future, than it is today. Will you go ahead and invest today, or would you wait until the price is lower? Or perhaps the asset is expensive but… [Read More]
We often hear – buy good companies and you will do well over time. If only it were this simple. As an investor, your goal is to buy good stocks. Often, good companies have good stocks and they make you good profits. Even more so often, investors find themselves invested in stocks of great companies… [Read More]
Value investing practice grows by learning from investors who have come before us and found success. Although I no longer put Warren Buffett in the category of classic value investors in Ben Graham‘s mould, he does espouse some of the key philosophies that we all can learn from. I recently took him to task by… [Read More]
Buffett no longer relies on book value as a valuation metric. Among the reasons stated: Book value does not reflect the current or market value of assets – it does not reflect the intrinsic value of the company Intrinsic value is a better metric for valuation Market prices are more relevant To which I say… [Read More]
James Holzhauer is currently in an unprecedented run on the game show, Jeopardy. He has broken many records so far, and he is going for the highest cumulative prize money haul in the history of the show. He already has won $1.69 million dollars as of this writing. He plays with one goal: maximize his… [Read More]
Uber IPO is scheduled for Friday, May 10. The stock is being offered at $45/share, at the lower end of the pricing range. You may be wondering if this is a great opportunity to get into the Uber stock “at the ground floor”. After all, Uber is an unicorn company. Perhaps this is the best… [Read More]
Return on Equity is one of the primary financial ratios investors use to judge a company’s operations. If I were to pick one metric that matters (OMTM) for investors looking into a company’s operational excellence, return on equity would be the that metric. It appears to be Warren Buffett’s favorite metric.
Financial ratios are an integral part of a value investor’s arsenal.
But, they do not always tell the full story. Or even the right story.
As an investor, you need to consider the ratio analysis as a part of what you do. The other part is to try and build a story around your investment and then see if the story checks out.
Limitations of Financial Ratios
An entrepreneur can be described as a person who organizes and operates a business or businesses, taking on greater than normal financial risks in order to do so. The latter part of that definition is a major reason why value investors are not good entrepreneurs. We hate risk.
To investors, Enron appeared strong and prosperous. However, what was hiding outside of their financial statements would lead to one of the largest scandals in Wall Street history. Chief Financial Officer, Andrew Fastow, argued a clever twist of the rules prior to being handed a six year prison sentence. By the end of 2001, everyone was left wondering what had just happened.
Although Enron’s manipulation was deemed illegal, many publicly traded companies partake in similar methods without raising concern from regulators. It is an accounting practice commonly known as off-balance-sheet activity.
Let’s get into what off-balance-sheet activity is and how it is used.
Over-diversification presents a clear risk to most investor’s portfolios. A typical investor is now diversified beyond the optimal. As a result the benefits of diversification are blunted, while the rewards are reduced due to over diversification. An optimally diversified portfolio should consist of 20-30 stocks in a variety of industries.
One of the consequences of using a volatility based position sizing strategy (we use the risk parity method) is that for highly volatile stocks, you may start out with a very small initial position. However, the level of undervaluation in the stock may call for a larger position to be eventually established.
This may lead you to wonder if the philosophy of value investing precludes us from using these portfolio optimization strategies.
Not at all.
Kelly Criterion was developed by John Kelly at Bell Labs. It has been proven to maximize the portfolio growth over time compared to any other strategy.
It is rumored that Warren Buffett and Bill Gross use Kelly Criterion or some modified version of it.