Ian Berry IT Blog

Graham focuses on Value Investing. According to Warren Buffet it’s “the best book ever written about investing”.

Book review (by Swedish Investor): https://www.youtube.com/watch?v=npoyc_X5zO8
Book Review (by Financial Freedom): https://www.youtube.com/watch?v=18r2RCVtqTg

Speculation vs. Investment

• Thorough fundamental analysis in the companies in which you are investing in to promise safety of the principle and adequate return.
• Protect your assets via diversification
• Seek stable companies with steady returns
• Always seek a margin of safety

Develop an understanding of inflation and its impact on your wealth. If inflation is 2.5%, and your bonds / investments are returning 2%, inflation is causing you to lose money each year (0.5%).

Meet Mr. Market. Mr Market is not always rational (often either too optimistic or too pessimistic – bipolar in nature)

• Be happy to sell when prices are ridiculously high
• Be happy to buy when Mr Market offers you a bargain

A stock is an ownership interest in a business.

The underlying value of a company does not often equal the price (someone is willing to pay for it).

• A great company isn’t a great investment if you pay too much for the stock
• The bigger the firm gets, the slower its growth rate becomes
• Always be on the lookout for temporary unpopularity; allowing you to buy a great company at a great price

Two types of investors

1. Defensive (passive investor)

• • Portfolio of:
    • 50% stocks (max 75%)  & 50% bonds (min 25%)
    • • Rebalance yearly
      • Invest regularly via Dollar cost averaging method
    • Diversify (10 to 30 companies, don’t over expose to certain industries)
    • Invest in only:
      • Large companies > $700m
      • Companies which are conservatively financed (assets are 200% its liabilities – 2 times)
      • Have paid dividends over the last 20 years
      • Have shown profit over the last 10 years (no earnings deficit)
      • At least 33% earnings growth over the last 10 years (equates roughly 2.9% growth annually)
      • Buy company cheap – Market cap less than 1.5 times its net asset value ( i.e.: market cap < (asset – liabilities) x 1.5
      • By cheap earnings – Price to earning ratio (P/E) of less than 15 (i.e P/E < 15)

2. Enterprising (active investor)

• Need to invest a lot of time, be eager to learn, have patience and discipline
• In general, avoid growth stocks as the value is based on ‘future earnings’ (may not materialise), rather than looking at a company’s current valuation.
• If you can find a company where its price is less than its net working capital – you essentially purchase all its fixed assets for nothing
  • Net working capital = current assets – liabilities
• Portfolio of:
  • Higher returning / higher risk assets
  • Some diversification
  • Invest in any size companies
  • Companies which are less conservatively financed (assets are 150% its liabilities – 1.5 times)
  • Paid a dividend in the last year
  • Growth > 0% (don’t worry about deficits as much)
  • Buy company cheap with tangible assets – Market cap less than 1.2 times its net asset value ( i.e.: market cap < (asset – liabilities) x 1.2

Key Concepts

Stock Valuation Concepts

• Stock valuation is an art
• Stock Valuation = Past and Current Numbers + Future Narrative
• Stock valuation is a range, not an absolute (as its based on assumptions)
  • Plan different scenarios (ie head winds, tail winds etc) and come up with different scenarios and value forecasts (ie ranges)

How to determine Value

• (Original) Value = earnings per share x (8.5 + 2 x expected annual growth rate)
• (Updated) Value = ( earnings per share x (8.5 + 2 x expected annual growth rate) x 4.4 ) / current yield on AAA rated corporate bond
• 
• https://en.wikipedia.org/wiki/Benjamin_Graham_formula

• Online Graham value calculators:
  • https://captaincalculator.com/financial/finance/graham-formula/
  • https://tradebrains.in/graham-calculator/
  • http://www.investingcalculator.org/investment/intrinsic-value/

Insist on a Margin of Safety (including how to determine value)

• https://www.investopedia.com/terms/m/marginofsafety.asp
• Mitigates the risk of being wrong (downside protection)
• Don’t ever lose money
• When the price is less than two thirds the value, you have a safety margin
  • Price < 2/3 of value (33% safety margin)
• Graham looks for a 33% safety margin

Insist on Moats

• https://www.investopedia.com/ask/answers/05/economicmoat.asp
• Competitive advantage, upside earnings engine:
  • Cost advantage
  • Size Advantage
  • High switching cost advantage
  • Intangibles (ie patents, brand, government licenses)

Risk & Reward are not always correlated

• You don’t have to take a higher risk to achieve a higher reward
• By committing to deep and time consuming analysis, by exercising maximum intelligence and skill you can find valuable companies to invest in (with low risk)